The two most commonly used asset transfer vehicles in the field of estate planning are the last will and the living trust. Far too many people assume that a last will is the only logical choice unless you are orbiting in the financial stratosphere, but this is not the case at all. When you understand the facts, you may come to the conclusion that a living trust is a better choice, even if you are not extraordinarily wealthy.
Hassles and Limitations
If you were to use a will to state your final wishes with regard to the distribution of your assets to your heirs, you would name an executor to serve as the estate administrator. Some people have seen movies and TV shows where the executor calls people aside into a room for a “reading of the will” after the funeral. The implication is that the resources will be distributed to the rightful heirs shortly thereafter.
In the real world, things do not work in this manner; the probate court is involved. To explain the basic reason for the government intervention through a simple example, let’s say that you lend a friend $200,000 to infuse into his business. Unfortunately, he passes away a couple of weeks later, and his surviving family members are rather unscrupulous, and they do not like you at all.
Under these circumstances, if there were no laws in place to prevent it, the executor could simply distribute the assets the comprise the estate among the people that are named in the will, and you could be left out in the cold . We personalized the example for a fact, but the same thing is true when it comes to corporate creditors.
To prevent this type of thing, the executor would be required to submit the will to probate, and the court would provide supervision. The administrator would notify the creditors about your passing, and they would have a certain amount of time to come forward to seek satisfaction. Final taxes would be paid during probate as well.
Another safeguard that is provided by the probate process is the window of opportunity for someone to challenge the validity of the will. Once again, this can be a very positive thing. Suppose your 89-year-old father marries a 25-year-old woman, and she revamps his estate plan to leave everything to his new spouse.
In order for a will to be valid, certain stipulations must be met. One of them is that the testator must be of sound mind, and there can be no intimidation or coercion. In a situation like this, you would be glad that probate exists if your father did in fact use a last will as the centerpiece of his estate plan.
On the other side of the coin, probate allows for scurrilous challenges that can slow things down to a standstill. And speaking of time consumption, no inheritances can be distributed while the estate is being probated by the court. This will take eight or nine months to a year, even if there are no complications.
There are also some considerable expenses that accumulate during probate. These would include legal fees, court costs, appraisal and liquidation expenses, the executor’s remuneration, and other incidentals. Monies that are parted with during probate are essentially coming out of the pockets of the rightful heirs to the estate.
Unless you take advanced steps like the inclusion of a testamentary trust, the heirs would receive lump sum inheritances, and this may not be consistent with your wishes. Finally, probate is a public proceeding, so anyone that has an interest can access probate records to find out how you decided to distribute your resources.
Revocable Living Trusts
All of the drawbacks mentioned above are avoided when you use a revocable living trust. It is possible to instruct the trustee to distribute assets to a spendthrift beneficiary in any way that you choose. Distributions are not subject to probate, and the records are not accessible to the public.
There is no open forum to challenge the terms of a living trust, but a lawsuit could be filed. As a preventative measure, people often include no-contest clauses that would completely disinherit anyone that challenges the terms of the trust.
Learn More About Estate Planning!
If you would like to take your estate planning knowledge to another level, attend one of our upcoming seminars. They are being offered free of charge, and you can visit our seminar schedule page to get all the details and register for the session that is right for you.