The two primary devices used in estate planning are wills and trusts. At times, a combination of both may be used.
To understand the advantages of each device, it is important to first understand probate.
Probate
Probate is the legal process that allows assets to pass from your estate to your heirs. Upon your death, your assets generally do not pass directly to heirs. During this interim period after your death and before probate is finished, a new entity of sorts is formed. That entity is your estate.
For the assets of your estate to be distributed to heirs, someone needs to petition the court to allow this to happen. If you have a will, so long as that will is clear and executed in accordance with the law, your assets will pass to heirs according to that will. If you do not have a will, your assets will pass to heirs in accordance with state laws.
What some see as a major drawback to probate is that it is a public process. Information about the deceased person’s estate becomes a matter of public record. Creditors and competing heirs have the opportunity to claim rights to your property.
Some see the publicity of probate as an advantage. For example, if you have concerns that an heir might try to act inappropriately with assets, having the court involved can be an advantage.
Finally, probate comes with costs. Generally the assistance of an attorney is needed to prepare the appropriate filings with the court.
Planning using Wills
A will is a document signed by you that dictates what you want done with your assets upon your death. Each state has requirements for signatures and witnesses on your will for it to be valid. This will is filed with the court as part of the probate process. This filing with the court is the point where the potential for litigation exists. Perhaps a child who feels they don’t get a fair share decides to contest the validity of the will by saying that you were not competent to make it at the time you did. This and other issues are possible, but not overwhelming common, when it comes to the probate process.
Revocable Trusts
As the name suggests, a revocable trust may be revoked. After you put property in a revocable trust, you may take it out later or end the trust altogether. Trusts are beneficial because they avoid the probate process. A trust document may say that during your lifetime you are both the beneficiary and the trustee of your trust. Then, upon your death the trustee becomes someone else and the beneficiary is now your child. This avoids the probate process because the owner of the property is still your trust, so no retitling of assets occurs. All that changed was the trustee and beneficiary. The downside to trusts is that they can be more expensive and they need to be funded. In other words, for the trust to be effective you must actually make your trust the property owner. For real estate this means filing a deed. For bank and investment accounts, this means opening new accounts in the name of your trust.
Irrevocable Trusts
An irrevocable trust is a type of trust that once formed cannot be amended or modified without a court order or with the permission of beneficiaries. Upon funding an irrevocable trust, the assets you contribute no longer belong to you. This type of trust is useful for public benefits planning and asset protection. Careful guidance and deliberation should be sought before using an irrevocable trust.
