ESTATE PLANNING BASICS

Trust VS. Wills, Which Is Best For You?

There are cases where a will is the best choice and cases where a trust is. Generally a will is indicated under the following circumstances (also see the 11 item list in the prior topic):

  1. The estate is small enough that formal probate won’t be required.
    -Or-
  2. It is reasonable and safe to leave all of the estate through beneficiary and/or joint tenancy arrangements (see the earlier topic, “Joint Tenancy Ownership of Property”)
    -And-
    1. There are no significant death taxation liabilities.
    2. There is no need to hold an heir’s share of the estate in some type of scheduled or controlled payout (for college or handicapped heirs for example).
    3. Mental incapacitation of the estate owner isn’t likely to cause problems with financial and legal transactions.

Some examples of where a will is likely the best choice are: (1) A young married couple whose net worth is less than approximately $50,000. Joint tenancy and beneficiary arrangements are desirable here, coupled with general purpose wills for each spouse. If one of the young spouses dies, the survivor is likely to live many more years and is likely to provide the best possible care for minor children the couple had together, making a trust unnecessary. A trust would probably be too cumbersome and costly in this situation. (2) Individuals or couples of any age whose estate is less than $75,000 to $100,000 total, and where the estate can avoid probate by safe beneficiary and/or joint tenancy arrangements (see the earlier topic, “Joint Tenancy Ownership of Property”). General purpose wills for each individual or spouse should be created.

Even though a will is not required for assets which are transferring by beneficiary and joint tenancy arrangements, a general purpose will should still be prepared. The will ensures that the non-beneficiary/joint tenancy property passes to the heirs of your choice, and that they receive the amounts or specific assets you wish them to have. The will handles the disposition of personal effects. The will serves as a catch-all, in the event that there are assets you forgot about, received after the will was prepared, or there is a problem or mistake with a beneficiary or joint tenancy arrangement. Most heirs will re-distribute their inheritance appropriately to the other heirs if they realize the beneficiary arrangement you set up was wrong and your will indicates your real choice.

A trust is generally indicated under the following circumstances (also see the 11 item list in the prior topic).

  1. The estate which cannot safely be transferred by beneficiary and joint tenancy arrangements exceeds approximately $75,000 to $100,000.
  2. There is some danger of a challenge by an heir, or would-be heir, to the estate transfer planning after the estate owner’s death. (A trust generally can withstand the challenges better than probate, and often in shorter time, and for less money and hassle.)
  3. Avoiding probate is an important goal.
  4. The estate cannot simply be paid immediately and outright to one or more heirs, meaning there are minors or other heirs who should have their share paid in a controlled or scheduled manner.
  5. There are significant death taxation liabilities.
  6. There is a need during the estate owner’s life to insulate assets from legal difficulties, or from a divorce with a non-owner spouse (needs for asset protection).
  7. The estate needs formal or detailed handling procedures during any period of mental incapacitation of the estate owner.

What Is a Trust?
The major family estate planning functions that trusts are required for are:

  1. Management of the estate during mental incapacitation
  2. Probate avoidance
  3. Reduction or elimination of death taxation
  4. Controlled transfer of estate to proper heirs
  5. Protecting the estate from lawsuits & seizures

In subsequent topics we will describe these functions and explain how trusts preform these tasks. But first, we will describe the basic characteristics and terminology of trusts.


A trust is a legal entity or device used to take care of property in special ways. Trusts are created by a legal agreement, basically a contract, between two parties. These contracting parties are known as the grantor and the trustee. The grantor and trustee create the agreement for the benefit of a third party known as the beneficiary. (See Figure 5 and refer back to the definitions at the beginning of this Section.) This agreement is private and is not an arrangement created by state statutes (as are corporations, for example). This is an important feature because private agreements have tremendous flexibility in their provisions. Even though a trust is a private agreement, it is recognized by the laws and courts as an independent legal entity, an independent owner of property. In fact, trusts are independent entities much like corporations. Thru their trustee trusts may own property, may file tax returns and pay taxes, may own bank and investment accounts, earn income, distribute profits to the beneficiaries, conduct business activities, etc.

As stated above, trusts have three parties to them: grantor, trustee, and beneficiary. Grantors are the individuals who own property which they wish to have managed, controlled, protected and transferred to heirs by a trust. Once their property is in the trust the grantors no longer hold the legal title to the property, though they usually retain the exclusive rights to use the property or its income and usually retain full control of the property. The trustee is the legal administrator of the trust and the legal title holder of the property. The grantors' relationship to the trust is determined by the language which they put into the trust agreement. The beneficiaries are the individuals or charities that receive benefits or income from the trust property, and eventually receive the property itself. When the grantors retain for their lifetime the rights to the income and use of the trust property, then the beneficiaries will receive their benefits after the grantors die. In still other cases the grantors and beneficiaries both receive benefits from the trust simultaneously.

Living Trust
A family trust in which the grantors hold all three positions -- grantor, trustee, and beneficiary -- is known as a living trust. This trust category is almost always revocable (se topic below). This is the type trust which forms the NAFEP Premier I Living Trust. The living trust really isn't a trust though because it is not an agreement between two separate parties, grantor and trustee. There is in fact just one party in the living trust, the grantor or grantors. Since one party cannot write a legally binding agreement with itself, the living trust is not a contract, not a complete trust during the lives of the grantors (even if there are two grantors, legally they are still one party). Therefore the living trust arrangement is not recognized by the laws and the courts as an independent entity. It is simply thought of as an extension of the grantors and as a special way the grantors have titled their property. However, if the grantors appoint an independent or separate trustee to administer the revocable trust and to hold legal title, there is then a real contract and a real trust regardless of who the beneficiaries are. If the grantor/trustees become mentally incapacitated, the pre-appointed successor trustee automatically assumes the trustee position, and then the living trust becomes a real trust. See Section 2 of this publication for a more detailed discussion of living trusts.

Beneficiaries
If the grantors retain the rights to the benefit, use or income of the property in the trust, then the grantors are also the current or primary beneficiaries. In that case the heirs who are named to inherit the trust property after the deaths of the grantors are known as remainder or secondary beneficiaries. If the grantors do not retain economic benefit or control of the trust property, then their heirs are named as the current beneficiaries.

Revocable and Irrevocable
An arrangement where the trust may be revoked or canceled at will by the grantors is known as a revocable trust. If a trust cannot be canceled by a family member without permission of the other parties to the trust, the arrangement is called an irrevocable trust. Irrevocable trusts usually are recognized as independent legal entities whereas revocable trusts are not.

The well known living trust referred to above is almost always a revocable type. However the grantors may choose to have an irrevocable trust and then receive some special or extra benefits. For example, an irrevocable, grantor controlled trust is the basis for creating an effective asset protection strategy, such as the NAFEP Premier II Life Estate Trust.


>INTRODUCTION

>WHY DO ESTATE PLANNING?

>PROBLEMS

>TAXES

>ESTATE TRANSFER & HEIR PLANNING

>TRUSTS vs. WILLS, WHICH IS BEST FOR YOU?


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