Quality estate planning and how to best achieve it
Quality estate planning should accomplish the following objectives:
- Transfer property to intended beneficiaries
- Maintain seamless and uninterrupted access to financial resources
- Safeguard distributions to young or incapable beneficiaries—without intrusive oversight
- Achieve these goals economically, privately, and with minimal, if any, legal assistance
Most people believe a basic will can be used to achieve these goals. However, apart from their effectiveness in transferring property to intended beneficiaries, basic wills do not accomplish any of the other listed goals. The reason is that most of us own, or hold a title, to property in our individual name (or “individual capacity”).
For example, John Smith buys a house. At the closing, the seller provides a warranty deed naming John Smith as the buyer. The deed is recorded. John now holds a legal title to the house in his individual name (or in an individual capacity). While he is alive, ownership in his individual name is not problematic; John is free to mortgage or sell without any legal restrictions. However, if he dies, holding a title in his name creates a problem, because a dead person cannot exercise legal control.
Death severs the legal title. When a person dies, as a legal matter, individually owned assets become untitled probate assets. This means the assets cannot be used until control over them is restored through the legal process known as Probate Law. Until a fiduciary is granted legal control over the assets by the probate court, they remain frozen.
For most of us, achieving the above objectives can be more effectively accomplished by using a living trust, rather than a will. This is so because when a living trust is used, the legal title to assets is held by a trustee, who holds them in a fiduciary capacity. Unlike when a property is owned in an individual capacity, death has no effect on the title to assets held in trust. Most people who use wills do not understand that the way they own their property has a direct effect on the applicability of probate to their estate plans.
Disadvantages of wills:
While they are a good idea, wills have four distinct disadvantages:
1. Wills require expensive professional fees to administer them through legal probate.
2. Wills do not provide seamless access to financial resources.
3. Basic wills generally lack safeguards to protect young or incapable beneficiaries and, if employed, require probate court administration and oversight.
4. Wills are not private.
Wills require expensive professional fees to administer them through legal probate. Professional assistance is not required to access accounts and pay bills when you are alive. Should it be any different for your family after you die? Unfortunately, if your estate plan is governed by a will, when you die, your financial assets will become probate assets and frozen until a fiduciary is appointed and granted legal control over them by the probate court. This may be a serious issue for your family if it relies on your finances to operate. In this case, your family will immediately seek the professional assistance of an attorney to navigate the probate process to restore access to those resources.
The professional fees to administer an estate through probate may be considerable. Connecticut allows reasonable compensation for work when administering an estate. A rule of thumb used by many Connecticut probate judges is that a fiduciary’s fee of 3% or less of the gross estate is reasonable. Using this formula, the cost to probate a $200,000 estate is $6,000. This large expense could be minimized or eliminated by establishing an estate plan that allows your family to remain in control of your property without probate after you die.
Wills do not provide seamless access to financial resources. The following examples illustrate how using a will cuts a family off from its financial resources:
You have a basic will and die with $40,000 in the bank. Your children arrange your funeral at a cost of $12,500. Your son, the executor of your will, visits the bank with the original will and funeral bill and requests a check for $12,500. The bank informs him that it cannot follow his instructions until he is officially appointed as the fiduciary of the estate by the court. He is told that upon receipt of his appointment, he can open a new estate bank account to pay the bill. Therefore, either arrangements must be made with the funeral parlor to accept future payment or family members must use personal funds and pay in advance. If, when you were alive, you held legal control of the $40,000 account as a trustee, to use as you pleased, it would not have become a probate asset when you died. In that case, as the fiduciary of the estate, your son could have written the funeral check directly from the trust account, no questions asked.
You have a basic will. You have three adult children. The will provides that after you die, your estate is to be distributed equally to each of them. You own an aggressive stock portfolio worth $375,000. You watch it closely, as it represents almost your entire net worth and is an important safety net for your family. You hear financial rumors that could seriously and adversely affect the stock market. After a discussion with your eldest son, who is the executor of your will, you decide to sell the stock. You tell him you will let him know as soon as the sale is completed. Unexpectedly, you die. To carry out your wish and preserve the brokerage account’s full value, your son calls your stockbroker and instructs him to liquidate the aggressive portfolio and place the proceeds into a money market account. He also tells the broker he has faxed over a copy of your death certificate and will, in which you named him the executor. Although he is sympathetic, the broker informs your son that he cannot follow his instructions until he can provide written evidence of his official appointment as the fiduciary of your estate from the probate court. Until then, the brokerage account must remain frozen. The following day, a financial crisis begins to erupt in the stock market. Over the next three days, the market drops 1,300 points. When your son finally receives his appointment, the portfolio is worth less than $250,000. If you had held your stock portfolio as a trustee in your living trust, rather than individually, the portfolio would not have been frozen when you died and could have been sold immediately, thereby avoiding the effect of the crash.
Basic wills lack necessary safeguards to protect young or incapable beneficiaries. Basic wills fail to safeguard distributions to young or incapable beneficiaries. Regarding young beneficiaries, the problem frequently arises when a will is drawn in favor of a beneficiary who is born after the will is signed. For example, a will contains wording that leaves property “to my children, or their living descendants who survive them, in equal shares.” In the example, the beneficiary who is born after the will was signed could be a child or grandchild. In either instance, the child’s age at the time of his or her distribution is not considered. Because basic wills do not contain trust provisions governing the timing and/or circumstances under which distributions may be made, any inheritances payable to minor beneficiaries are distributed to them outright, with no strings attached, when they reach the age of majority (typically eighteen years of age). At the age of eighteen, most young adults are financially immature and unable to handle large sums of money responsibly. Ill-timed distributions to young adults have the potential to harm their motivation to work and achieve.
You and your wife have basic mutual wills. You have one child, a sixteen-year-old daughter. Upon both of your deaths, your daughter is the sole beneficiary of your combined estates. Until recently, your combined net worth was modest. In fact, you were living hand to mouth. However, three months ago, you received an inheritance from a rich uncle, and your combined estate is now worth $2,000,000. Your daughter recently celebrated her sixteenth birthday and got her driving permit. For her birthday, she asked you to buy her a four-wheel-drive Jeep so that as soon as she gets her license, she can drive to school and visit her friends. You are concerned about the request because, until recently, you couldn’t afford to put gas in your car. You need to have a heart-to-heart conversation with her to discuss priorities. You want her to understand that financial independence is an important ingredient to future happiness and security. You fly to Europe with your wife for a well-deserved vacation. En route, the plane crashes due to engine failure, killing everyone onboard including you and your wife. Because she is a minor, your daughter’s considerable inheritance is placed into a custodial account. When she turns eighteen, the entire inheritance is turned over to her outright. If your estate had been placed into an estate plan designed to safeguard the timing and circumstances of distributions, the approval of a trusted adult fiduciary would have been required before any distributions could have been made. Because a basic will was used, with no safeguards put in place, your estate and your daughter’s future well-being are in jeopardy.
Wills are not private. When a will is probated, the will and all required court filings become part of the public record. This means that all estate assets and debts will be made public. Any distributions made through the probate are also made public. Most families would prefer to keep this information private.
THE PROBLEMS AND HARDSHIPS CAUSED BY WILLS ARE AVOIDABLE
The common, underlying reason for the disadvantages and problems described above is that when you die owning assets in your individual name and you have a will, legal probate is required. Therefore, it is important to understand there is another way to pass on your estate without invoking probate. It is called a living trust. It requires some work to implement. However, the resulting advantages should significantly outweigh the effort and cost. A living trust avoids the asset freezing of probate because when employed, your property is titled in your name as a trustee, not individually. Practically, being the trustee of property held for your sole use and benefit is no different from holding it individually. You continue to manage the property for your sole use and benefit, the same as you did before establishing the trust. However, when you die, probate is avoided because, unlike when assets are individually owned, the legal title to trust assets is not severed by death. Rather, they remain in the trust in the hands of your named successor trustee. In this type of estate plan, the successor trustee takes on the same duties and obligations as the named executor in a will, but with one significant advantage: They do so seamlessly. Living trusts are an excellent way to achieve the objectives of estate plans.
Why should you use Hilly?
I believe no family should be without the benefits afforded by a living trust estate plan. Living trusts provide seamless control over estate plan resources and allow access not afforded by wills. Living trusts also safeguard inheritances by placing control of distributions in the hands of capable and trusted fiduciaries, who have the discretion to withhold payments to ensure they are used as intended. Everyone desires these benefits; however, many take them for granted and do not understand that using basic wills may not provide the desired results. For these reasons, I highly recommend living trusts to my estate planning clients.
I take great satisfaction that ensures my client’s estate planning goals and permits their families to carry on after they die privately with minimal if any, professional assistance. I would appreciate the opportunity to help you secure your estate planning goals, and I pledge to do my best to make it affordable to you.
The document offered above is for informational purposes only and not to provide legal advice. With respect to any specific issue or problem, you should contact an attorney for advice.