Law schools across the nation offer a course entitled "trusts and estates." While this article will not go into the subject matter as intensely as law school, you will learn important concepts and terminology related to estate planning.
In plain, modern English, the term "estate" refers to the assets of a deceased asset owner. In a sense title to the assets is "clouded" because only the living may own property. To ensure that the estate transfers to a living person, a court will exercise authority over the matter, preside over the administration of the estate, adjudicate any creditor claims, and ensure that the right people receive the estate assets.
Intestate succession
Many Americans have no estate plans at all. When this happens, the estate is said to be "intestate." If the deceased had a will, the estate is "testate." These are terms you will hear again and in different forms. For example, a trust created by a will is a "testamentary trust." The opposite of testamentary trusts are those created while living, i.e., a "living trust".
In the absence of direction from the deceased asset owner in a will, a probate court will transfer title to 'heirs" according to state law. These statutes are called "intestate statutes." The word "heir" means any person to whom property will pass if the deceased had no Will.
Estate transfer process
Estate planning has one objective: to transfer the estate to predetermined people rather than those the intestate statute identifies with the least amount of estate erosion as possible. Clearly, a Will makes this, the transfer of estate assets to whom you love, much easier.
Advantages of probate
Many believe that a Will should not be used a probate is required to administer the estate. There are three scenarios in which a probate is preferred:
- You are married and want to protect your spouse's inheritance from Medicaid spend-downs, liens, and transfer penalties with a special kind of trust authorized by federal law.
- There are or could be claims against your estate for your debts or judgments against you, e.g., physician was sued for malpractice but died before the lawsuit concluded. Probate is the only way to permanently bar creditors if they do not appear in the probate. Even if a creditor does make a claim against the estate, state law exempts homestead and other special kinds of property from these claims.
- Family members may begin to disagree and conflict arising. A probate provides a sobering affect on bickering and reduces conflict because notice is given to all interested parties. Many states require the Executor to file reports and serve potential heirs and beneficiaries with copies. Information reduces speculation.
Alternatives to probate
A Will is not the only way to transfer property to loved ones after you die. As mentioned above, a living trust is an alternative to a Will. A trust, like and estate, is an invention of the law. The difference between a Will and a living trust is that a living trust owns your assets before you die, often years before. While living, you may act as trustee and appoint yourself beneficiary. This gives you full control over the assets. This renders probate unnecessary because the title of the assets are lawfully valid even when you die. That is, the assets still have title because the trust is a legal entity that lives beyond your lifetime and the assets are owned by the trust, not you.
Living trusts are popular estate transfer devices. The living trust can contain tax savings or family planning trusts that spring into existence when you die. A living trust cannot contain a trust in which the surviving spouse is the beneficiary and the trust assets are Medicaid exempt. Only a Will can do that.
Transfer on Death Deeds
Many state laws authorize real estate transfer deeds that become effective on the property owner's death. These deeds render a probate unnecessary for the transfer of real estate. This approach is inexpensive compared to the cost to set up a living trust.
Beneficiary Designations
Financial accounts hold "intangible personal property", e.g., stocks, bonds, mutual funds, and other financial assets. All financial institutions allow the account to vest title in a beneficiary designated before death. This, like transfer-on-death deeds, render probate unnecessary.
Conclusion
The goal of estate planning is to predetermine the recipient of your property. The methods to transfer assets after you die are 1) a Will, 2) a Living Trust, 3) Transfer-on-Death Deeds, and 4) Beneficiary Designation. A good estate plan will determine if there is a need for probate, such as the desire to protect the surviving spouse's inheritance against Medicaid spend-downs.
Of the three probate alternatives, a living trust has the highest cost and is the least convenient. It is not convenient because, in most cases, a lawyer must draft the trust, and attorney's fees are higher than the cost of a Transfer-on-Death Deed or beneficiary designation. In most cases, the result is the same: property transfer to loved ones at death.
