Frequently Asked Questions
1. What is an estate?
There is a common misconception that "estates" are exclusive to multi-millionaires. A residence, no matter how large or small, is part of an estate. An estate is, quite frankly, everything a person owns in his or her own name or owns with another person, everything payable to his or her estate, and everything controlled by that person. Your estate can comprise your residence, cash, stocks, bonds, and other investments, as well as businesses that you own. Your estate also comprises of retirements plans, such as IRAs and Keogh's, and life insurance death benefits. It even includes personal property, such as vehicles, collectibles, and other treasured items.
2. What happens if I die without an estate plan?
All of us have planned our estates, whether we know it or not. If you do not have a will or a living trust, the state where you live has an estate plan for you, and you are not likely to hold it in high regard.
Should you become disabled, the court, not you or your family will choose and appoint a conservator to inventory, appraise, and manage your assets and report the information to the court. That information usually becomes part of the public record. There will be attorney and conservator fees imposed against your estate to pay for this privilege.
When you die, your estate will be subject to probate. Again, your assets will be valued and listed in the public record. Creditors will be individually notified of their right to make claims. And the administrator of the estate and the administrator's attorney will each be entitled to a fee.
Once all the creditors, your administrator, and your attorney have been paid, your assets will be distributed to your beneficiaries according to the preferences set forth in your state's statutes (the law of intestate succession). If a share passes to your children, it will be given to them immediately and without restriction if they are 18 years of age or older. If a child is not of majority (18 to 21 years of age), a guardian and conservator will be appointed to control his or her persona and inheritance until the child reaches the age of majority, at which time the child will receive his inheritance, or what's left of it, outright.
If a share is established for your spouse, the size of the share will depend on your state's laws and on the way your property is titled. Your spouse may get all of your estate or very little.
Some assets do not go through probate, but this might not be much better. Life insurance proceeds will pass to whomever you named as the beneficiary. If you forgot one of your children, or if your ex-spouse is still listed as your beneficiary, there may be no recourse because a beneficiary designation supersedes the state's law as to who will receive your property.
Compare this "plan" with the way in which you would like your property to be held and administered in the event of your death or disability. You will probably decide that a plan you design and control is called for.
1. What is a revocable living trust?
A trust is a contract between its maker and a trustee. In the contract, the trust maker gives instructions to the trustee concerning the holding and administering of trust assets. These instructions specify how the assets are to be held and distributed during the maker's good health, upon his or her disability, and ultimately upon his or her death.
With a revocable living trust,a person can be (and usually is) both the maker and the trustee. A husband and wife will often be joint trust makers and joint trustees of a joint trust.
The term "revocable" refers to a set of powers that are typically listed in the trust agreement which specify that the trust maker has the power to amend or revoke the trust. Upon revocation, the trustee is directed to return all trust assets to the trust maker. In addition to having the power to amend or revoke, the maker has the power to place assets into the trust, remove assets from the trust, make all investment decisions concerning trust assets, and control and direct all payments and distributions from the trust.
2. What is the difference between a revocable trust and an irrevocable trust?
As its name implies, a revocable trust can be revoked, changed, or amended by the maker of the trust at any time. Its maker can update it as his or her desires and the needs of loved ones change. This flexibility makes a revocable living trust an ideal foundation for almost all estate plans. A revocable living trust can be designed to control all of the maker's property, totally avoid the probate of the maker's estate, and maximize federal estate tax savings.
Irrevocable trusts, on the other hand, cannot be altered or amended without the approval of a court. Accordingly, irrevocable living trusts should be used only in certain circumstances after careful consideration and planning. Most often, irrevocable living trusts are used in conjunction with revocable living trusts to hold certain, select assets of the trust maker for the benefit of the trust maker's loved ones. If the trust maker retains no rights in the irrevocable living trust and is not a trustee or a beneficiary of the trust, the assets of the trust can be excluded from the trust maker to lower and, at times, eliminate federal estate taxes.
Irrevocable living trusts can be described as an advanced estate planning tool. They are most commonly used by individuals whose gross estates are taxable for federal estate tax purposes. Unlike revocable living trusts, irrevocable living trust are rarely the foundation of one's estate plan but, rather, a supplement to it.
3. What is a will?
A will is any written document in which the maker states his or her intention to devise or bequeath his or her real or personal property at death. For a will to legally enforceable, it must conform to the specific legal requirements of the state in which it is created.
The important features of a will are as follows:
- A will must be prepared and executed with the formalities required by the laws of the jurisdiction in which it is created.
- A will takes effect only on its maker's death.
- A will affects only assets which are owned by the maker alone and which do not pass to others by the operation of law or by contract (joint tenancies and beneficiary designations).
