Will or Trust Planning, How should I decide?

You have two basic choices for transferring your assets on your death: the will, which is the standard method, and the living trust. If you die without either a will or a living trust, state law controls the disposition of your property.  And the state of Connecticut does not know you or your family situation.  Relying on the laws of the State of Connecticut will also be more troublesome — and definitely more costly.

WillThe primary difference between a will and a living trust is that assets placed in your living trust avoid probate at your death. Neither the will nor the living trust document, in and of itself, reduces estate taxes — though both can be drafted to do this. Whether a will or a living trust is better for you, depends on many personal factors. Let’s take a closer look at the alternatives.

Will Planning

Most people think that Will Planning is a more economical option to deal with decisions relating to wealth transfer.   You have two basic choices for transferring your assets on your death: the will, which is the standard method, and the living trust, which has become most popular and provides more complex planning than even a detailed will. If you die without either a will or a living trust, state law controls the disposition of your property. And settling your estate likely will be more costly and require your family to file in a public forum, the local probate court.

If you choose will planning as an exclusive method of dealing with your estate, your estate and all of the assets contained in it will have to go through probate. Probate is a court-supervised process to protect the rights of creditors and beneficiaries and to ensure the orderly and timely transfer of assets. It has been described as a lawsuit, filed by you against yourself, paid for by you, and for the purpose of distributing your assets for the benefit of your heirs.  The probate process has six steps:

  1. Notification of interested parties. Most states, including Connecticut, require disclosure of the estate’s approximate value, as well as the names and addresses of interested parties. These include all beneficiaries named in the will, natural heirs and creditors.
  2. Appointment of an executor. If you haven’t named an executor, the court will appoint one to oversee the estate’s liquidation and distribution.
  3. Accumulation of assets. Essentially, all assets you owned or controlled at the time of your death need to be accounted for.
  4. Payment of claims. The type and length of notice required to establish a deadline for creditors to file their claims vary by state. If a creditor does not file its claim on time, the claim generally is barred.
  5. Filing of tax returns. This includes final income and estate taxes.
  6. Distribution of residuary estate. After the estate has paid debts and taxes, the executor can distribute the remaining assets to the beneficiaries and close the estate.

The total costs of probate range anywhere from $2,000.00 to many thousands of dollars.

A will can be advantageous because it provides standardized procedures and court supervision. Also, the creditor claims limitation period is shorter than for a living trust.

Facing our mortality and planning for it, requires that we all realize that there is an end.  Adults of all ages should have a Will, as unexpected events can occur at any age, however unlikely.

A Will is an important piece of every estate plan. A Will provides specific instructions about how and to whom a person's estate shall be distributed upon their death. Without a valid Will, state laws known as "intestacy statutes" provide who will receive your assets. The government - and not you - would dictate how your property, your assets, and your other valuables are divided among family members. More importantly, without a proper Will and accompanying estate plan, your loved ones may have to proceed with a costly and time-consuming probate process. A Will can help avoid this - especially when drafted in conjunction with simple trusts.

A Will provides certainty as to who is responsible for handling your estate - whatever size it may be. Even if you are not wealthy, a simple appointment of an executor in your Will can save your loved ones substantial money in court costs, and designate who you want to be in charge after your death.  They will gather your assets, pay debts, hire any necessary professional for things like tax returns and make certain filings in Court.  Finally, they will have the duty to ensure that the balance of your assets are distributed in accordance with your wishes.   

Another important aspect of a Will is helping to decide who should take care of your minor children, in the unlikely event of an untimely death. While a difficult thing to discuss, it is better to decide before a tragedy, who would care for your children and how they would be provided for in the future. Through your Will, you can establish a guardian for your minor children and ensure proper management of finances beyond when your children turn 18.  Absent a Will, any funds will likely be distributed to your children in full upon their turning 18.  Is this how your wealth should be distributed?
 

Your Will can be amended as your personal circumstances, goals, and planning purposes change. Regular reviews of your estate plan to ensure compliance with the latest tax laws; your own personal family situation and any changes in you life circumstance should be cause to consider additional planning. Marriage, re-marriage and divorce require a re-write of your Will.  In the event one of these events occurs, you should review your Will with a qualified attorney as soon as possible.

Trusts

Will ProbateAll trusts are simply a set of instructions.  As a legal matter, they are contracts that act to manage assets by one person, the Trustee, for the benefit of others (the beneficiaries).  A trust creator (the “settlor” or “grantor”) creates the trust, usually contributes assets to the trust, appoints a trustee to manage the trust and its assets, and designates the beneficiaries of the trust.  The Trustee has a legal responsibility to manage the assets of the Trust for the benefit of the beneficiaries.

Depending on how the trust document is drafted, the beneficiaries can have rights to the assets immediately in some amount, or the beneficiaries may have rights in the future, such as a trust that gives the beneficiaries funds when the beneficiaries reach a certain age.  Trusts can have many uses in estate and legacy planning, since they can provide much more flexibility than a straight grant of property.  In addition trusts, unlike Wills can set plans for disability.  Below are some different types of trusts that can be used in estate planning:

Revocable Living Trust:  A Revocable Living Trust is established during the trust maker’s life to determine disposition of his/her assets if he or she becomes mentally disabled and upon the trust maker’s death.  This type of trust is used in most estate plans, for clients with both relatively simple and complex estates.  During the trust maker’s life, the trust maker can be both the trustee and beneficiary of the trust, and therefore have complete control over, and derive all benefits from the trust assets during his/her life.  The Living Trust identifies specific trustees and beneficiaries to be automatically designated upon the death of the trust maker. 

A living trust offers additional benefits. First, unlike probate, your assets are not exposed to public record. Besides keeping your affairs private, this makes it more difficult for anyone to challenge the disposition of your estate. Second, a living trust can serve as a vehicle for managing your financial assets if you become mentally incapacitated or disabled. A properly drawn living trust avoids embarrassing guardianship proceedings and related costs, and it offers greater protection and control than a durable power of attorney because the trustee can manage trust assets for your benefit.  This plan allows the trust to continue to operate, and allows the newly appointed trustee the legal rights to manage the assets of the trust.  As a result there is no need to seek Probate Court approval for a conservator to handle the assets of the person disabled.

A Revocable Living Trust created in an appropriate manner, leaves assets in protected ways for loved ones.  Living Trusts also share ideals in a way that a Will cannot.  A fully funded Living Trust can also help avoid costly and time consuming probate proceedings necessary for the disposition of your assets.  The most common error in using Trust planning for property distribution is failure to fully fund the trust during the lifetime of the trust maker.  Without proper funding, assets may not be distributed properly and most importantly the benefits of disability planning are totally lost.

Family and Marital Trusts:  These are often sub-trusts within a Living Trust (or sometimes contained in a Will).  The purpose of these trusts is to maximize the amount of property that may be passed on to loved ones, free of state and federal estate tax, and to ensure that no estate taxes will be owed until the death of the surviving spouse.  To achieve these tax-saving goals, the Living Trust is divided usually into sub-trusts. First, is a Marital Trust (which is usually divided for tax-saving purposes in two sub-trusts), in order to take advantage of the state and federal estate tax exemptions for the sole benefit of the surviving spouse during his or her life.  Second, is what is often referred to as the Family (or Credit Shelter) Trust, which can be for the benefit of the spouse, children, and/or any other beneficiaries that the trust maker wishes.  There are countless variations of this type of trust that we could draft, depending upon a client’s circumstances and estate planning objectives.       

When we do these trusts, we also ask people to consider whether they want remarriage protection.  Since most people find the planning for their death difficult to consider, we often find that those same people do not think about the possibility of remarriage for the surviving spouse. An unintended result can occur, if the proper planning is not done, with the unintended consequence being that if the surviving spouse remarries then passes away leaving their assets to their new spouse, the first spouse’s wealth or life insurance passes to the new spouse to the detriment of children or other relatives.  If this is a concern, we often suggest certain re-marriage protections in the Family and Marital Trusts.

Irrevocable Trust:  In contrast to revocable trusts, an irrevocable trust is a trust that cannot be modified once created.  Therefore, an irrevocable trust is best used when one wishes to make a permanent gift.  Because the trust maker has relinquished control over whatever assets may be put into these trusts, care must be taken in drafting the instructions for the Trustee and for use by the beneficiaries of the assets.  There are many different types of irrevocable trusts, which depending on client objectives, we can use in addition to the Living Trust, to provide clients with a way to further maximize estate tax savings and protect and transfer wealth.   

Irrevocable Life Insurance Trust:  Most people are under the impression that life insurance proceeds are not subject to Federal Estate Taxes. This is not true.  While the proceeds are received by your loved ones free of any income taxes, they are includible as part of your taxable estate and therefore your loved ones can lose up to half of its value to estate taxes due from your estate.

An Irrevocable Life Insurance Trust is created specifically for the purpose of owning your life insurance policy. A properly established and administered trust holds the policy outside of your estate, and keeps the proceeds from being taxable to your estate. The proceeds from the insurance policy can then be used to replace assets that were lost to beneficiaries through the payment of estate taxes. The ILIT beneficiaries may receive the income from the proceeds that continue in trust, and/or may receive principal distributions.

The ILIT will be the policy owner and beneficiary. Once your trust is established, you use your annual gift tax exclusion to make cash gifts to your trust. Your beneficiaries forgo the present gift (in lieu of the future proceeds), and the trustee uses the remaining gift to pay the premium on the life insurance policy.

Our firm is dedicated to helping clients make educated, informed decisions about their assets, and will work with you and your team of financial advisors and CPAs to implement a highly sophisticated estate plan.

Special Needs Trust:  A special needs trust, also known as a supplemental needs trust, is a trust whose beneficiary is an individual who has a disability, and who may be eligible for governmental assistance in the form of Supplemental Security Income, subsidized housing, Medicaid, etc. Because these programs are generally needs-based, eligibility to receive benefits is dependent on falling below certain wealth thresholds.  Assets held in a Special Needs Trust for the benefit of a person with a disability (if set up properly) will not be counted towards determining that person’s total assets, so they will not impact eligibility for governmental aid.  Peck & Tuneski will work with you and other professionals to insure that assets in trust for someone with special needs are protected to the fullest extent of the law.

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