Will or Trust

Wills & Trusts
You should have both a will and a revocable trust if your estate amount qualifies. Your heirs may pay higher taxes with only a will and it will take much longer for your heirs to complete probate. Probate lawyer fees are much more expensive than for revocable trust. The following info may be helpful.

I just finished drafting a new will and a revocable trust based on Suze Orman's document models. All I have left to do is to pay a small fee to a probate lawyer to see if my document terms comply with my state's (New Mexico) laws.---BBB

Suze Orman - Wills & Trusts

Wills and trusts help us to protect ourselves. These documents indicate who will make important decisions for us in the future. For this reason, understanding how wills and trusts work is extremely important. When do you need a will? When do you need a trust? What is the difference between the two? Suze Orman explains the ins and outs of this very important topic.

WHAT IS A LIVING WILL?

A living will has nothing to do with where your assets go.
It is a medical document that tells doctors and family members what kind of care you want if you become incapacitated and cannot express wishes.
To make sure doctors follow these orders you need a durable power of attorney for health care and an advance directive. These two items instruct the doctor and designate a person to make decisions for you in terms of health care.

WHAT IS THE DIFFERENCE BETWEEN A WILL AND A LIVING REVOCABLE TRUST?

A will designates where your assets go upon death. But sometimes you need someone to make these decisions when you get sick. This is why you need a living revocable trust.

You can appoint yourself as the trustee when you are well and a successor trustee if you become incapacitated.

This makes it easier to get money to your beneficiaries without going through probate court, which can take between 6 months and two years.
A living revocable trust with an incapacity clause will cover all of the bases.

GUARDIANSHIP

Suze Says:

If you cannot agree on guardianship for your child, you will be leaving that decision to the state. The state will assign someone to care for your child. Be smart and make that decision before it is too late.

There are different types of guardians who will oversee your child's life. One type will decide where your child will live, what religion he or she will practice, where he or she will go to school, what medical treatment he or she will receive.

Another type of guardian is in charge of how money is invested and how it is distributed. If you set up a living revocable trust then all can be taken care of within the trust. You can designate the terms before you die.

If you are setting up a 529 college savings account, a 529 Plan Trust can be a successor beneficiary and the child can be the first beneficiary. When it comes to your children, do not leave decisions up to the state.

WHAT IS A HOLOGRAPHIC WILL?

A holographic will is one you write with your own hand. Suze says they are better than nothing but there are far better alternatives. To avoid problems, set up a living revocable trust and have the trust as the beneficiary of the life insurance policy.

WHAT ABOUT LEAVING MONEY TO MINORS? SHOULD I USE AN IRREVOCABLE TRUST TO PREVENT THEM FROM SPENDING THE MONEY IN THE WRONG PLACES?

When leaving money to minors, like nieces and nephews, find a good successor trustee who can dole out the money. Do not use an irrevocable trust for people you care about. An irrevocable trust can never be changed and you never know when someone you care about may be sick or need financial help. Only use an irrevocable trust for tax purposes.

WHEN SHOULD I THINK ABOUT GETTING A WILL?

Everyone has a will whether you know if or not. The state has already designated where your assets are going if you do not decide for yourself. Suze says everyone needs a will if you have any assets whatsoever. Designate who will get your car, puppy, furniture, etc. Once you have real estate, it is then time for a living revocable trust.

COMMUNITY PROPERTY STATES

A married couple should own a home in community property with right of survivorship.

If one person dies, the spouse gets a step-up in the cost basis on the entire home, so you will save in income tax if you sell the house.
You need a living revocable trust with an incapacity clause in case one spouse is unable to make decisions. If not, the government and lawyers could be getting the money that should be going to your loved ones.

ESTATE TAX

Right now in 2008, a parent can pass up to $2 million to a child estate tax free. In the future that is going to change. The amount that can be passed on will increase until 2010 according to the following scale:

2008 $2 million
2009 $3.5 million
2010 NO TAX
2011 $1 million

You or your parent can gift $12K a year. If the laws change in the future, make sure your parents gift to help avoid paying hefty estate taxes.

Suze Says: Just because the federal government says you may be left $2 million tax-free does not mean the state you are living in has the same regulations. Certain states follow different guidelines. Check your state. You may owe money on the state level.

TERM LIFE INSURANCE POLICY

If you have a policy of which you are the owner, you are insured and your children are the beneficiaries, the life insurance death benefit goes into your estate when you die. This money passes down to your children. If this money is over the estate tax limit, your children are going to have to pay 40%-45% of the insurance policy to estate taxes.

Two ways to avoid this:

Set up an insurance trust. The insurance trust owns the insurance policy. You are the insured but the owner is the trust. When you die the money goes into the trust, not the estate. The beneficiary of the trust may be your children or whomever you want. This keeps the money from estate taxes. The only downfall is that this type of trust is sometimes expensive to set up.

The other option is, if your children are old enough and responsible, they can be the owner of the policy, you can be insured and they can be the beneficiaries. If you die, since the children own it, the policy money is not in your estate.

Suze Says: Don't put your name on your parents' house!

When you inherit property you get what is called a step-up in cost basis. Say you bought a home for $200K and it is now worth $1M. The new cost basis on the house is the current value of the house. If you inherit your parents' house and then sell it immediately, you will pay no income tax whatsoever. If your name is on that asset and your parents die, you are only getting a step-up in cost basis on your parents' half of the house. Your half will be the price your parents originally paid for the house. For income tax purposes it is much better to inherit an asset (such as a house) then to have your name on that asset (especially if the asset has increased in value).

SHOULD I SET UP A UTMA OR UGMA ACCOUNT FOR MY CHILDREN IN MY WILL?

If your kids are minors and you have a will, you can set up a UTMA (uniform transfers to minor account) or UGMA (uniform gift to minors account) where money goes into the account and a custodian protects the account. Suze thinks a better idea is to set up a living revocable trust and name the trust the beneficiary of the life insurance policy. Then you can designate a successor trustee to protect the children's money.

BBB
More information on why you should have both a will and a revocable trust:

Avoiding Estates of Confusion
Trusts vs. Wills

from You've Earned It, Don't Lose It!
by Suze Orman

Below is the chapter on wills and trusts that is taken directly from my first book You've Earned It Don't Lose It. This chapter was written with the help of my own trust lawyer Janet L. Dobrovolny.

http://www.completetrusts.com/trust_vs_will.html

BumbleBeeBoogie
Am I in your will? Just kidding, I wanted to say nice post. Thanks for answering the question.

TTH


Of course you are in my will. I'm leaving you my list information sources so you can drive A2Kers nuts with cut and paste articles, too.

BBB

Re: Wills & Trusts

That is an extraordinarily complicated way of doing something that should be very simple. First of all, the death benefit from a term life insurance policy (or any life insurance policy) only goes to the decedent's estate if the estate is designated as the beneficiary -- which, by the way, isn't a very good idea, since, as Orman points out, if the insurance payout goes into the estate, there's a chance that the heirs will have to pay estate taxes. Instead, the insured should simply designate his/her heirs as the beneficiaries under the policy. That way, the benefits don't go into the estate in the first place. Furthermore, life insurance benefits are not taxed as income to the beneficiaries, so there's no tax advantage to having the insurance benefits pass through the estate before going to the beneficiaries.

Joe
Thanks for the additional information re life insurance policies.

BBB

I don't have kids and I haven't researched this, but can the beneficiaries be minors?

Of course they can, TTH. My child is the beneficiary and a minor.

Joe, can't the life insurance be included as an asset in the living trust?

According to this article you shouldn't name a minor as a beneficiary:

http://www.newyorklife.com/cda/0,,16438,00.html
"Sometimes, seemingly minor oversights can have tremendous consequences. Take life insurance, for instance. Most of us tend to name our beneficiaries when we buy a policy... and then never give the matter another thought. That could be a mistake.

Example: One of the biggest mistakes is naming a minor as beneficiary. On the surface, it makes sense to designate your children as beneficiaries, especially since you are buying the coverage to protect them. However, if you die while they are minors, a number of legal complications will ensue."

Sure.

As for naming minors as beneficiaries, I'm not convinced that the problems are as substantial as claimed. Of course, the court would have to appoint a guardian for the minor's estate -- which would typically be the surviving parent or the person designated by the will to be the guardian. That's not very different from having the life insurance proceeds being placed in an inter vivos (living) trust, where the trustee would be in charge of maintaining the assets rather than a guardian. I'd imagine that, in most situations, whether its a guardianship or a trust is pretty much six of one and a half-dozen of the other.

Thank you, Joe. Good to know about the life insurance.

And yes, I have a guardianship agreement included in the living trust.
Every lawyer initiating the trust would advice to set one up.

Probably should check out what the state tax laws are too since they differ from one state to another. Imo it is best to use an estate attorney. Thanks for all the info joefromchicago.

Re: TTH

Oh in WA State, if you have personal belongings you want to leave to a particular person, all you have to do is put it in writing and sign it. The personal belongings don't have to go in the will. Like if my mom wants me to have her diamond rings, china or whatever.