Benefits of Estate Planning: Wills and Trusts
By default, in Kansas, and many other States, your assets are split 50/50 between your spouse and your children at the time of your death. If you do not have children, everything goes to your spouse. If you do not have a spouse, everything goes to your children. If you have neither, everything you own goes to your parents or siblings.
Your assets are transferred, as indicated above, via a probate process referred to as Intestate Succession. This is a public process where your local District Court will appoint an individual to take control of your assets and distribute them according to the default rules of your State. This process includes public hearings, public filings, and newspaper publications regarding your Estate. It is costly, time consuming, and it can be unnecessarily contentious.
Fortunately, you have the option to provide for a different plan to take place upon your death by executing estate planning documents ahead of time. In these documents, you can direct exactly what you want done with your assets and who you want to be in charge. Some mechanisms even allow you to avoid the probate process altogether. While this post is not meant to provide a full list of the benefits of executing estate planning documents, I will talk about several reasons why they are important.
A last will and testament serves a number of purposes. It allows you to outline how your property is to be distributed upon your death, and determine at what age, and under which circumstances, you want the heirs under your will to receive your property. It also allows you to appoint a guardian for your minor children and appoint an executor to administer your Estate. It gives you peace of mind knowing that you have provided for an orderly management of your assets and that your loved ones will be taken care of upon your death.
A trust serves many of the same purposes, but also has some important differences from a will. While a will must go through probate to be effective, a trust does not. A properly funded trust will avoid the probate process and make the transfer of assets to your beneficiaries much simpler.
The best way to think about a trust is like a bucket which captures all your assets upon your death. All your assets go into the bucket, and then are distributed out to the beneficiaries according to the terms you provide. An important point about setting up a trust is making sure that all your assets are owned by the trust or name the trust as the beneficiary. Typically, for jointly owned accounts or for accounts owned by a single person, the trust will be the primary beneficiary. If a married person has an individual account, such as an IRA, the spouse will be the primary beneficiary and the trust will be the contingent beneficiary.
When setting up a trust, we also prepare a document called a pour over will as a precautionary step. The reason we also draft a pour over will along with a trust is because sometimes clients acquire new assets after they have set up their trust or a client forgets about an asset when setting up the trust. The pour over will captures those assets and transfers them into the bucket.
Oftentimes clients ask, “Do I really need a will or a trust – can’t I use beneficiary designations to transfer assets?” The answer, like most answers in the law, is “yes…but.” Sometimes transferring your assets to named individuals by using beneficiary designations is appropriate, but what happens if those individuals predecease you? What if those individuals are still minors when you die? What if that person has many creditors? Beneficiary designations alone cannot sufficiently answer those questions.
When setting up a trust, we do a comprehensive review of the client’s assets and make sure that once the trust has been executed, the trust is either the owner or the beneficiary of the asset. That way, there should be no need to go through the costly, public, and time-consuming probate process. Within the trust, you designate to whom you want your property to be distributed, what happens if one of those individuals predeceases you, at what age you want the individual to receive property, and who you want to be in charge of administering the trust. The person in charge of administering your trust is called the successor trustee. You can appoint one or more individuals to serve in this capacity, and you can designate those individuals to serve jointly or independently of each other.
A trust is also useful if you have a beneficiary with special needs. Oftentimes that beneficiary will be receiving government benefits that could be compromised if they receive assets directly. In this situation, you would want to set up a special or supplemental needs trust for that individual to hold any assets he or she might receive from your trust, and you can appoint a separate trustee of the supplemental needs trust, if necessary. That person would be in charge of providing distributions for that beneficiary’s care and comfort.
Anther point to consider is charitable giving. This too is made easier through the establishment of a trust, and allows for a variety of organizational and tax benefits. You can establish a trust specifically for charitable and tax purposes or you can implement a charitable gift directly within your primary trust. If you go with the latter option, a typical approach is to state that a certain percentage of your assets is to be distributed to the charity prior to distribution to your children or other named beneficiaries. Designating a percentage of your assets to charity, instead of a specific dollar amount, better accommodates changes in the size of your Estate.