One of the most common reasons for visiting a lawyer is to discuss the consequences of a death in the family. No wonder lawyers are not the most popular group of professionals.
Lawyers call the process estate planning, and it is important, especially for anyone who owns substantial assets. With the consultation of your attorney and the preparation of the proper documents, you can assure that your financial affairs will be properly handled after death--that your estate will be divided among the individuals you select and the taxes they pay will be minimized.
One obvious method of estate planning is the preparation of a will. A will is a set of written instructions for a court to follow that identifies the people who will inherit your property and names an executor who will handle your business affairs until the property is distributed. It can also be used to select a guardian for any minor children.
A less well-known estate planning device, but one that is growing in popularity, is called a living or inter vivios trust. Its primary advantage is the avoidance of probate, the court-supervised legal process used to implement the instructions in a will. Probate can be expensive because there are established percentage fees (based on the value of the estate) that must be paid to the probate lawyer and executor.
Probate is also a time-consuming process and, if an estate is complex, can drag on for several years. Using a trust speeds up the process substantially.
There are other advantages to establishing a trust. It can be used to lawfully reduce taxes. For instance, federal inheritance tax is owed only on estates worth more than $600,000. So if you have a million dollars, and leave all of it to your spouse, who in turn leaves it to the children, they will have to pay tax on $400,000. (The spouse does not have to pay tax because of an unlimited marital deduction that allows the transfer of assets from one spouse to another without any federal estate tax due.)
On the other hand, a trust could be used so that upon the death of the first spouse, it splits into two trusts, neither worth more than $600,000, and the children eventually inherit the entire $1 million, avoiding the tax entirely.
(If you didn't understand that tax analysis, don't worry; if you have that kind of money, you need a tax lawyer, not a newspaper columnist.)
Another advantage is privacy. By using a trust, you don't have to list all your assets in court records, where they are open to public inspection. That's why many celebrities use this technique.
If you become seriously ill and incapacitated, the trustee selected in your trust document can handle your financial affairs in the interim without seeking a court appointment as your conservator. (The same result can be achieved in California and some other states by using a particular "power of attorney," which is much less expensive to prepare.)
But, contrary to what some lawyers will tell you, trusts are not for everyone. First there is the cost involved in preparing the documentation, ranging from $500 to several thousand dollars, depending on the value and complexity of the estate.
Some Estates Exempt
If you have a small or simple estate, you may be able to use the state-authorized fill-in-the-blanks will form or have a lawyer prepare a will for as little as $125. And in California your heirs may be able to avoid probate entirely, without using a trust if the gross value of your estate is worth less than $60,000 and does not include real estate.
Second, there is some paper work involved. You have to transfer all of your assets into the name of the trust and maintain all additional transactions in trust form. If you don't do this properly and in a timely fashion, your estate may still wind up in probate. This added inconvenience may be especially burdensome to younger people who do a lot of investing, buy and sell assets regularly or expect to be fairly mobile. Senior citizens and others whose assets are stable will suffer through less paper work.
In any event, before you take any serious estate-planning steps, you should do a little research (there are many excellent books on the subject) and then consult a qualified attorney.