global Tax Demystifying Wills and Living Trusts April 29, 2013 Examining the difference between wills, living trusts and specific beneficiary designations? There are three basic ways to split up and transfer assets after a person has passed: the will, which is the most typical method; the living trust, which offers certain advantages over a will; and specific beneficiary designations, for assets such as IRA’s and life insurance. If a person dies without a will or living trust, state laws take over to dictate who receives your assets and settling your estate will likely be much more difficult and costly. One significant difference between a will and a living trust is that assets placed in a living trust generally avoid probate at your death. Neither the will nor the living trust document, in and of itself, reduces estate taxes - although both documents can be drafted with estate tax savings in mind. Wills If you choose to use just a will, your estate will most likely have to go through probate. Probate is a court-supervised process to protect the rights of creditors and beneficiaries and to ensure the orderly and timely transfer of assets. The probate process generally has six steps: Notification of interested parties. Most states require that the approximate value of the estate be presented as well as the names and addresses of interested parties, which includes all beneficiaries named in the will, natural heirs and creditors. Appointment of an executor or personal representative. If you haven’t named an executor or personal representative for your estate, the court will do so for you. This person will be responsible for overseeing the estate’s administration and distribution. Inventory of Assets. Essentially, all assets you owned or controlled at the time of your death need to be accounted for. Payment of claims. There are standard deadlines that vary by state by which creditors have to file their claims. If a creditor doesn’t file their claim on time, they are usually dismissed. Filing of tax returns. This includes the individual’s final income tax return and the estate’s income tax returns. Distribution of residuary estate. After the estate has paid its debts and taxes, the executor or personal representative can distribute the remaining assets to the beneficiaries and close the estate. Probate can be advantageous because it provides standardized procedures and with the court overseeing the administration of the estate, it ensures that everything is handled in an organized fashion. Another bonus, the creditor claims’ limitation period is usually shorter than for a living trust. Living Trusts Most often, it is common for people to want to avoid probate since it can be time-consuming, potentially expensive and public. A living trust (also called a “revocable trust”) acts as a will substitute, although you’ll still also need to have a short will, often referred to as a “pour over” will. Your living trust works like this. You transfer assets into a trust for your own benefit during your lifetime. You can serve as the trustee, select some other individual to serve, or select a professional. A common rule of thumb is that you will likely avoid probate no matter what state you live in if all of your assets are in a living trust when you die, or if any assets not in the trust are held in a manner that allow them to pass automatically by operation of law ( such as a joint bank account). The pour over will can specify how assets you didn’t transfer to your living trust during your life will be transferred at death. Some of the benefits of a living trust include: Keeps your assets private. Not exposing your assets to public record makes it increasingly more difficult for anyone to challenge the disposition of your estate. Helps manage your financial assets. If for any reason you become incapacitated and are unable to manage your assets for yourself, a properly drafted living trust avoids guardianship proceedings and related costs. It also offers greater protection and control than a durable power of attorney because the trustee can management trust asset for your benefit. If you have any questions about your estate plan or would like to talk with a qualified estate planning advisor please contact David Shuman, CPA or any member of the KLR Private Client Services Group.
