Wills, trusts & estates

Introduction

In his essay, Is Shakespeare Dead?, Mark Twain wrote, “when a layman ventures to plunge deeply into legal subjects, he is naturally apt to make an exhibition of his incompetence.” Twain may have had estate planning in mind. For inquiring but untrained minds, this page offers a short, high-altitude summary of wills, estates, and trusts. It also explains why every adult should have a written will and most would also benefit from a revocable living trust.

What is a will?

A will is a document written by an individual known as the testator. The will explains how the testator wants his or her property to be distributed after he or she dies. Wills also typically signal the testator’s instructions for burial, cremation, and funeral services. Additionally, if the testator has minor or disabled children, the will can identify a guardian. For animal lovers, wills can also direct that assets be used to fund a pet trust to provide ongoing care for dogs, cats or even pet chinchillas.

While the will must be written and signed during the life of the testator, the will becomes legally effective only after the testator passes on. Only properties that are included in the testator’s probate estate come under the power of the will. Today, assets like bank accounts, retirement plan accounts (like IRAs and 401(k)s), and real estate can be structured to avoid the probate estate. Determining which properties should and should not get into the estate — and making sure they are all headed in the right direction — is an important estate planning task.

Who can receive property through a will?

Any natural person (a living, breathing human being) or legal person (like a university or corporation) can receive property through a will, subject to law and public policy constraints. While the testator generally has wide leeway in sending property whereever, in most states, spouses and minor children of the testator are automatically entitled to some minimum period of support from the estate of a deceased parent.

Who needs a will?

Nearly every adult needs one, especially those who have a spouse or children.Why? Because property that gets into a testator’s probate estate will eventually come out of the estate and end up somewhere. Most people who own property prefer to have a say in the “where”. Without a will, the decedent gets no say at all: property in the probate estate will be distributed according to applicable state intestacy law, which controls the distribution of property of intestate estates. An intestate estate is an estate that lacks a will.

Should I write my own will?

Probably not. While a DIY will might save costs on the front end, problems are typically identified only after it is too late to fix them. Estate planning is a complex business. Seemingly small drafting errors can have large negative effects on outcomes. A modest investment in expert advice and drafting offers peace of mind now and can pay off in the long run for heirs who must pick up the pieces after the death of a family member.

What is a trust and why create one?

A trust is a separate legal entity into which a settlor (also sometimes called grantor) places assets for safe-keeping. Trusts can help manage assets and income streams for minor children, adults with mental disabilities, and even adults whose spending judgment is suspect. Trusts can also protect assets from creditors, heirs of second spouses, and even state or federal government agencies wanting to gobble up assets of elderly or disabled individuals to fund care. Trusts can be especially helpful in minimizing conflict among half-siblings in blended family groups or among full siblings who may not play well together.

One significant advantage of trusts over wills is that assets placed in a trust prior to the settlor’s death never become part of the settlor’s probate estate and, therefore, are not subject to the often costly and contentious probate process. Another advantage is that with capable contingent trustees in place, the assets of a settlor who becomes either temporarily or permanently incapacitated are automatically under the care of a competent manager: trust assets avoid costly guardianship or conservatorship proceedings in court. Management of the trust assets transitions smoothly from settlor to contingent trustee(s).

In limited circumstances, a carefully drafted, specialized IRA beneficiary trust may help reduce the tax drain and extend the “stretch out” period for calculating minimum required distributions or MRDs.

While a well-drafted trust is marvelous tool, poorly drafted trusts can have negative legal or financial outcomes. Like individuals and corporations, trusts are subject to income taxes and, in this regard, suffer from a serious tax-bracket disadvantage compared to individual taxpayers. For trusts, the top marginal tax bracket (39.6%) begins when the trust’s 2015 taxable income reaches $12,300; for individuals, the top bracket begins at taxable income of $413,200 ($464,850 for married filing jointly). Thus, it is important to get good tax and estate planning advice to minimize costly tax consequences.

What about DNRs and healthcare directives?

While it is not technically part of a will or trust, an important part of a complete estate plan is what is now typically called an Advance Directive for Healthcare. The Advance Directive — which covers two separate documents formerly called “health care power of attorney” and “living will” — communicates specific instructions to medical care providers regarding how much care you want them to deliver if heroic measures (like intubation) become necessary. Medical care in these situations can be both brutal and costly. The Advance Directive gives you the power to decide in advance whether to accept or reject such measures.