We Did the Homework on Your Will & Trust FAQs
Wills and trusts provide the foundation of estate planning. While the article “The Difference Between a Will and a Trust” provides an introduction to choosing between the two financial planning tools or using them both, many individuals find they have specific questions they would like answered without needing to phone or email their attorney.
While we already established in the prior article that you probably need to use both tools, especially if you earn a high income, within the realm of trusts, you have many from which to choose.
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Everything You Wanted to Know About Will & Trust
This Will and Trust FAQ (Frequently Asked Questions) article should provide a quick answer to the major questions that crop up. Grab some coffee. Make it an espresso. This delves into the nitty-gritty of estate planning and will require caffeination.
Will and Trust FAQ: The Basic Definitions
These essential terms factor into discussions of all estate planning and financial management.
What is a will?
The term will refers to a written document that instructs your beneficiaries in how to distribute and handle all matters of your estate including property, assets, social media, etc. in the event of your death. This document names the will’s executor, the person responsible for estate administration, and completing the will’s instructions. If you have minor children, the will names their guardian.
What is a trust?
The term trust refers to a legal contract for asset management during life and after death. You can create a trust as a standalone estate management tool or use it in conjunction with a will. Two basic types exist - living trust and testamentary trust. A trust might be irrevocable or revocable. Many variations exist. (More on this later in the FAQ.)
What is probate?
The term probate, or probate court, refers to a type of legal court that supervises and administers the appropriate disposition of the asset and property distribution of an individual’s estate in the event of their death. The probate court also supervises the payment of the deceased’s debts. Probate only handles items that do not directly transfer, so it does not administer the transfer of life insurance payments, annuities, retirement plans, or jointly held property.
What is a grantor?
The term grantor or settler or trustor refers to the individual creating the trust. The grantor contributes the majority or all of the assets and/or property to establish the trust.
What is a trustee?
The term trustee refers to an individual or individuals managing the trust property for the beneficiaries of the grantor. They typically receive a fee for property management. In some cases, the grantor can function as the trustee of their own trust.
What is a successor trustee?
The term successor trustee refers to the individual who will manage the trust when the grantor dies or becomes incapacitated.
What is a corporate trustee?
The term corporate trustee refers to a business or company, typically a bank, credit union, or financial institution of another type that professionally manages the trust. Known for their objectivity, corporate trustees can provide investment savvy not available from a friend or family member.
What is a beneficiary?
The term beneficiary refers to the individual or individuals who benefit from the trust after the death of the grantor. Whether you use a trust or a will, the document will have beneficiaries.
Can you appoint a trustee and a corporate trustee?
Yes! You can name a corporate trustee and a private individual as a trustee. The two will jointly manage the trust. By using both, you benefit from the investment savvy of the corporate trustee and the personal knowledge of the private individual trustee who knows you and can speak from experience as to what you would want. The latter might apprise their corporate counterpart of your support of environmental businesses so that your assets do not get invested in a strip mining venture or coal mining, but rather in the forward-thinking areas of solar and wind power.
Will and Trust FAQ: Matters Surrounding Probate Court
How do you avoid probate court?
You must work hard in advance to avoid needing to go through probate court at all. If you use a living trust, you must transfer all of your property into it. That includes bank and investment accounts, financial assets, real estate, and other real property, as well as your business's interests. You also need to clear up any debts and financial obligations before your death. Some states require probate to establish the primary residence’s homestead status. You can also hold all property jointly with rights of survivorship with your life partner, spouse, or other individual (typically a family member). The surviving spouse/partner/co-owner assumes full ownership upon your death. If you know in advance of your impending demise, such as receiving a diagnosis of a terminal illness, you can distribute property and assets as gifts before your death. Consult an attorney before using this method though since an individual or group can challenge it in court and if the court finds you did it to hide assets or avoid debt, the court will reverse the gift under the finding of a fraudulent conveyance. Life insurance payments and retirement accounts automatically skip probate.
What are the probate court benefits of using a revocable living trust rather than a last will and testament?
Neither provides a fool-proof manner of avoiding probate court. As long as you leave a will that designates a beneficiary for all property and assets, and you have no significant unpaid debts at death, your will can replace the probate process. A Revocable Living Trust must include all property and assets. The benefit of the latter is it typically results in unfettered and uninterrupted access to property, assets, and income. This also hinges on you having no significant unpaid debts. The other benefit of a Revocable Living Trust is that when constructed properly, it allows for management of financial assets and property in cases of temporary disability or illness.
Why might you want to use a method that went through probate court?
Probate court limits the time for filing a claim of a right to a portion of your estate to three months while without probate court, individuals and organizations have a period of up to two years to file a claim. The trustee of the will or trust may choose to wait two years before the distribution of assets occurs.
What happens if an individual has no trust or will established?
Individuals who die with neither a trust or will established will have their property and assets distributed according to standard rules within their state. The court distributes equally to the individual’s spouse and family. In cases where both parents have died and there are minor children involved, the court appoints a guardian. The guardian may control inherited property and assets but typically cannot sell them.
Will and Trust FAQ: Trust Types
Many types of trust exist. This complex area of law creates and establishes financial frameworks for the protection or administration of property for the benefit of the grantor and beneficiaries.
What are the types of trusts?
You can have a living trust, but there is no such thing as a dead trust. Let’s just get that one out of the way now. You can have trust that is revocable, meaning you can change it or one that is irrevocable, meaning once you make it, it exists for life. Literally.
Explain the difference between an irrevocable and revocable trust?
With a revocable trust, you get to add more property and assets or change the beneficiaries while you, the grantor, remain alive. You cannot do that with an irrevocable trust. That second home you bought after you set up the irrevocable trust has to have a separate trust set up for it. If you choose a revocable trust, though, you can add the second home to it. You can have a living trust or a testamentary trust. (You can also have a living will or a will and testament. There is no dead will. You were probably thinking of “Deadwood,” and that is a totally different thing.)
What is a living trust?
With a living trust, the property and asset management of the grantor becomes the responsibility of the trustee while the grantor lives and after the grantor dies. While alive, the grantor can function as their own trustee and have others also jointly manage the trust as trustees. (See above for the discussion of a joint management of a corporate trustee and an individual trustee.)
What is a testamentary trust?
A testamentary trust only becomes valid upon the death of the grantor. At that time the trustee assumes responsibility for the trust. In both types of trust, after the death of the grantor, the surviving trustee assumes the role of manager to disburse the property and assets contained within the trust to the beneficiaries of the grantor. Both types get drafted while the grantor lives, but the testamentary trust only becomes valid once the grantor dies.
How does an irrevocable living trust work?
Although they get used the least often, the irrevocable living trust provides some distinct advantages for asset protection. For this reason, high-income individuals favor it. The grantor creates this trust to protect assets and property and ensure that they go to precisely whom they wish them to go. They name the trustee and the trustee handles the management of the trust. In this type of trust, the grantor cannot typically function as their own trustee. Written properly by an experienced attorney, this provides an ironclad method of asset protection. Since not all states do as Florida does in providing protection for the primary residence as a homestead, an irrevocable trust does this. If you know that you will not disown any child or grandchild and that you will not divorce, or that if you do you will not mind your ex-spouse still inheriting from you, you are pretty safe using this. You also need to know that you will not have future children or grandchildren because you would have no way to add to this type of trust.
Many people would find it hard to function if they offloaded every piece of property and asset into an irrevocable trust. Imagine having to buy and hold for life. You cannot pull any asset out of this type of trust once created. For that reason, people typically use this type of trust only to protect the property they could not stand to imagine mismanaged or sold off or lost. Since the trust owns it after its establishment, this type of trust protects the property in the case of bankruptcy or another catastrophe.
Can I function as the trustee of the revocable living trust I create?
Yes! The grantor of a revocable trust typically functions as their own trustee. This lets them continue to control their property while knowing that the successor trustee they chose will assume management after their death.
Does using a will or trust ensure my beneficiaries can instantly access to property and assets left to them after my death?
Not necessarily. Using a revocable living trust makes the transition easiest, but only owning property jointly with your spouse or partner can create a seamless transition.
For whom does a living trust work best?
Those of middle age or older who own property and have significant assets to protect can use a living trust.
For who does a last will work best?
Those of a young age who are in good health and who have modest assets can use a last will and testament to distribute their estate.
How does holding property jointly affect the need for a trust or will?
Holding property jointly negates the need for probate. Upon death of one spouse, the other automatically assume full ownership.
Will and Trust FAQ: Matters of Estate Taxes
Using a will or trust does not mean your beneficiaries will not owe taxes. These questions explore matters of estate taxes.
Does having a will or trust reduce estate taxes?
Not really. The current unified tax credit for an estate is $1 million. If your estate’s fair market value exceeds that, the excess incurs tax. If the total fair market value is $1.4 million, you must pay federal estate tax on the $400,000 that exceeds the available tax credit.
Estate taxes explained
At the federal level of taxes, what your estate owes gets determined by its fair market value less the available tax credit. At the state level, the estate may also owe an estate tax. The successor trustee and/or the will’s executor have the responsibility of making sure the estate pays its tax bill.
What estate planning tool protects my assets from creditors?
Holding assets and property jointly including bank accounts can protect the items from seizure by creditors. In some states, such as Florida, the primary residence receives protection as a homestead. Only real property owned by a natural person (not a corporation or trust) can receive the homestead status in Florida. An irrevocable trust can protect assets and property. You can give gifts of assets, property, and cash before your death.
Consult Your Attorney
Hopefully, this answers most of your questions about wills and trusts. Before you make a final decision on which to create, consult your attorney. You might include your financial planner or certified public accountant in this meeting, especially if you are a high-income individual with multiple properties or you just began learning how to handle money.
You will likely start out with a will as a young person, but transition to using a living trust as you get older. The exception to this is those who earn a large salary as a young person and amass a great deal of property and assets. The majority of individuals in their 20s and 30s only need a will though since they earn an average income.