Estate PlanningFinance

Living Trusts v. Wills: What and Why

Estate planning is not always easy or straight forward but it can be done

Do you have a home, a car, or a checking account? Congratulations, you have an estate! No matter how small your estate is, it is almost invariably worth putting a little thought into what will happen to your estate after you die. What happens to your money, cars, and home?  Who gets what? Will your spouse and children be taken care of in the case of an emergency? Taxes? What does probate even mean?

Honestly, there are a myriad of complicated questions and issues at hand when it comes to estate-planning. Never fear, though! We at the Brown Law Firm have put together a quick introduction into what happens if you do not do any estate planning and two of the most common ways to prepare your estate, streamlining the time-consuming, probing, and costly process of the probate courts.

What happens when there is no plan:

Single, no children: All of your estate goes to your parents

Single, children: Your estate goes to your children in equal shares

Married, no children: Half of your estate goes to your spouse; the other half goes to your parents.

Married, children: Half of your estate goes to your spouse; the rest is divided equally between your children.

Divorced, children from different marriages: Identifying what property was acquired during the marriage and rightfully belongs to the children of a previous marriage often requires a seasoned legal mind. Talk to your lawyer or the Brown Law Firm for a good legal opinion.

Unless, there is a prenuptial marriage agreement in affect, the above guidelines are the general stipulations provided by Oklahoma law for the division of an estate. The Court will try to split up your property as evenly as possible into the partitions described above.

When entering the probate court process keep in mind that it is a lengthy, public court process. The court is going to need to take inventory of everything you own, list out the individual’s remaining debts, identify who the legitimate heirs are, and make appropriate provisions for the liquidation and distribution of your estate. Needless to say, getting together all that information takes a court and lawyers a significant amount of time. Additionally, if your children happen to be minors at the time of your death, the court will require an appointed guardian to provide annual accounts of how the minors’ inheritance is being maintained until majority is reached. Such an arrangement is a costly and complicated process and one of the main reasons why individuals seek to prepare their estates before their passing.

Any opportunity to avoid the probate process or shorten it should interest anyone concerned with how their legacy is passed on and with the wellbeing of their loved ones. Wills and trusts, in slightly differing capacities, can help you make the appropriate preparations so that your wealth can be passed with as few glitches as possible and with as little taxes taken as possible.

Solution 1: The Will

The will is the foundational document used to direct the passage of one’s estate after death. Its primary uses include:

  1. Naming beneficiaries
  2. Choosing a personal representative or executor
  3. Naming guardians for children
  4. Instructing how assets are to be distributed
  5. Instructing how debts and taxes are to be paid

While they do not preclude one’s estate from the probate process, wills make the wishes of the deceased known and can greatly speed up the otherwise arduous process. They can be used to direct the distribution of almost all kinds of property (something trusts cannot do), tie up loose ends with items of personal nature, leave messages for loved ones, and provide access to accounts and passwords for specific individuals.

Simple, easy to create, and easy to modify, wills are the most viable option for streamlining your estate for the probate process. In Oklahoma, a will can simply be a handwritten, dated and signed if the creator is at least 18 years old, of sound mind, and has two witnesses on hand. There are several drawbacks to wills, however. Wills cannot keep your estate from passing through probate court, a public proceeding. Wills can be challenged in court and if certain heirs are not named in the will, giving the state the power to override the wishes of the will’s creator and allocate funds to that unnamed beneficiary. Nevertheless, a will is a necessary legal instrument that nearly every individual ought to prepare. Overall, it is one of the most cost effective means of seeing that your wishes are carried out after your passing.

Solution 2: The Revocable (Living) Trust

What a trust does:

  1. Avoid probate for certain assets
  2. Transfer property out of the creator’s estate
  3. Maintain privacy
  4. Offer protection from legal challenges
  5. Name a trustee to maintain trust property

Whereas a will is a general tool used to tie up the loose ends after one’s death, a trust is a specific instrument used to protect the passage of certain assets to their beneficiaries through the probate process. Unlike a will, a trust cannot direct the payment of debts or taxes, it cannot give away a beloved knit scarf passed down by your grandmother, and it cannot name a guardian for your kids. It is made to give away valuable assets and property.

There are several issues that differentiate a trust from a will. First, creating a trust is like creating a separate legal entity. To create a trust, property has to be transferred out of the individual’s name into the trust’s ownership. You would never do this with a will. Second, trusts require a significant amount of paper work and a solid understanding of the legal issues at hand; therefore, trusts tend to be more expensive than wills. Because they require a transfer of property and are generally costlier, trusts are not useful for most small estates.

Trusts break down into two primary groups: irrevocable trusts and revocable trusts. Irrevocable trusts permanently transfer property and assets from an individual into the new trust entity where the property will be distributed once the stipulations of the trust are met. The separation of the trust from the grantor (person creating the trust) is so complete that the grantor is not permitted to maintain the assets once they are held in trust. A third party (the trustee) must be appointed to maintain the trust and separate income tax filings must be filed for it. Once set in place, irrevocable trusts cannot be undone. Revocable trusts (also known as “Living Trusts”) are not quite as extreme as its irrevocable brother. That is, while the grantor is still alive, the terms of the revocable trust can be altered and the grantor retains control of the assets though they have been transferred into the ownership of the trust. Revocable trusts allow a little more breathing room for its creator to make adjustments. Once the grantor dies, however, the stipulations of the revocable trust are set in stone and the trust becomes irrevocable.

So, what are the benefits of using a revocable trust? First, probate is primarily focused on seeing that an individual’s estate is appropriately distributed. When an individual bundles up some of his or her bigger assets into a trust and moves them out of the estate, the overall estate size is reduced and the probate court has less property to sort out. The resulting reduction of time spent in probate represents significant cost savings, not to mention stress reduction. Second, wills are public documents, so everyone will know how an individual’s estate is divided up. Because all probate proceedings are carried out in public court, whatever comes out in the court, including gory family feuds over assets, is public knowledge. The contents and stipulations of trusts, on the other hand, are kept private. By moving the bulk of one’s assets into a trust, the individual can conceal how assets are divided from prying eyes. Third, trusts are generally thought more difficult to attack in court than wills. If an heir feels unfairly left out of a trust, there is less chance of them successfully wrenching away part of the property from the trust. This serves the double purpose of preserving the intentions of trust creator and mitigating hostile court battles over assets. Finally, grantors must name a trustee in the creation of their trust. A trustee will manage the property held in trust if the grantor becomes incapacitated. With a trustee already named, conservatorship (the court process of naming a trustee) can be avoided, reducing probate costs.

Overall, revocable trusts are a useful tool for individuals who would like to protect the passage of their estate to their heirs. They offer several key protections that wills do not. It is key to remember, nevertheless, that trusts are not a substitute for a will.

The Scorecard

  Revocable Living Trusts Wills
Name beneficiaries for property X X
Leave property to young children X Maybe (see below)
Revise your document X X
Avoid probate X  
Keep privacy after death X  
Requires a notary public X  
Requires transfer of property X  
Protection from court challenges X  
Avoid a conservatorship X  
Name guardians for children   X
Name property managers for children’s property   X
Name an executor   X
Instruct how taxes and debts should be paid   X
Simple to make   X
Requires witnesses   X
Reduce estate taxes
Leave money to pets
Leave final wishes
Leave passwords for online accounts

Credit: Nolo at http://www.nolo.com/legal-encyclopedia/living-trust-v-will.html