With life comes eventual death. We are all going to die someday and for the vast majority of us we don't know when this will occur. For that reason alone, it is never too soon to "get one's affairs in order." That means planning for what happens to what you leave behind and how it relates to one's survivors.
When my father passed away last year I discovered I was to be the executor of his estate. At first a mild panic set in. I have friends who have been executors and do not recall any of them describing it as a pleasant or easy duty. Worse, my father resided and passed away in California, a state known to write laws that guarantee, to the greatest extent possible, the necessity of hiring an attorney to accomplish all but the simplest of legal matters.
Before I even saw my father's Last Will and Testament I spent a day reading California's probate laws. They're online. It was not until I was near the end of them that I found the part that would actually apply to my father's estate.
When we looked into all the various assets to establish a value of his estate, we discovered something extraordinary. My father did everything right. There could not be a cleaner estate.
My father, a baker all his working life, was a man of modest means. His life became more and more financially comfortable as each of us five children moved out and paid our own way. He had banking accounts, some investments, annuities, life insurance, and Social Security. It was not a large enough estate to meet the threshold for probate, but even modest estates must go through probate (think lawyers) if certain conditions are met or other conditions are not met.
Everything my father owned was also jointly owned by my mother, who survived him. When I say jointly owned I mean both names were on the deed, the title, the account. When he passed away a year ago, he left no estate. Absolutely everything that was in his name was also in my mother's name. All else was community property and simply became hers. You cannot leave a cleaner estate than that.
So why am I telling you this? Because even in death my father continues to teach me something worth learning. I have also learned some things from observing the experiences of others.
If you are married (and plan on making it work until the graveyard end), consider my father's example. If you are not yet married but probably will be one day, think about this but first concentrate on having a solid marriage when that day comes. Joint ownership/title/accounts/investments/etc. means automatic passage to the surviving partner. No probate judge has to oversee it. No lawyer can take it away from the survivor unless there are debts the survivor completely ignores. I greatly admire what my father did to make his passing easy for my mother and everyone else.
Had he named "beneficiaries" in his Will there would have been a lot of work for me as executor and it is doubtful I could have avoided hiring a probate lawyer. Monetary disbursements stipulated in a will usually require prior approval by a probate judge -- even though specified and the value of the estate was below both the Federal and California thresholds for probate. Yes, maybe it could have been done with simple petitions to the court I might be able to filed myself, but maybe not. It is, after all, California.
Even if the disbursements stipulated in a Will could be made without a court's oversight, there is still a weight of paperwork required by the executor to account for all the dollars and cents to the IRS. I am so glad my father did not give his children, grandchildren and great-grandchildren "gifts" and I did have to prepare dozens of Schedule K-1s for the IRS.
If you want to leave money to children, consider making them beneficiaries of life insurance policies rather than a Will. The money is disbursed by the insurance company, not the estate. It just cleans it up for whoever has to handle the affairs of the estate and removes the temptation of greedy souls to go after the estate's assets. An estate that has no assets automatically closes. Other options are making them beneficiaries of banking or investment accounts, which also takes the assets out of the estate "cleanly."
Living trusts are popular and have many advantages and a few disadvantages. Advantages are privacy (they are not public record), it avoids probate, it is revocable and amendable, it is tax neutral, there is an immediate transfer of trusteeship, it is generally less costly than administering a Will. Disadvantages are it is slightly more costly to set up than a Will, oversight provisions are internal and therefore private, it is easier to pilfer if full disclosure and reporting are not made to the beneficiaries.
I personally know four people whose parents established living trusts for their benefit and not one of them received a dime. In one case the beneficiary was a minor and distribution had to wait until age 21 -- by which time there was nothing left to distribute. The other three cases involved step-parents who survived as trustees and liquidated the trusts' assets long before their own death triggered distribution of assets to the intended beneficiaries.
If you create a living trust to carry out your intent rather than exercising other options, be sure you include specific safeguards to protect your intent. People who create trusts obviously select successor trustees they believe will carry out their intent honestly and diligently. But having a small fortune at your fingertips without stringent oversight might prove too tempting to any but the most righteous.
Not being a lawyer, I cannot offer legal advice. But I can report what I have observed.
All but one of the living trusts I referenced were written before the internet using do-it-yourself books with software included containing all the boilerplate templates to fill in and print out. The other was probably written online using similar software. All created iron-tight living trusts that facilitated taking all the assets out of the estate and thus avoiding probate completely. What all assumed is that all parties would be scrupulously honest and subscribe to the intent of the trust.
The parties involved were the grantor/trustor (the person creating and funding the trust), the trustee (the trustor while alive), co-trustees (usually the trustor and a spouse, who in none of the cases was the natural parent of the beneficiaries the trusts were supposed to ultimately benefit), the successor trustee (the co-trustee spouse or a person designated by the trustor), and the beneficiaries.
A co-trustee elevated to sole trustee upon death of the trustor usually controls all assets within the trust as if they were their own until their own death, at which time the assets are distributed to the beneficiaries by another successor trustee as stipulated. I've noted a distinct problem with this arrangement.
When a step-parent becomes sole trustee upon death of the trustor, that person's loyalty to the spirit of the trust and the intended beneficiaries wanes dramatically. This is especially true if the step-parent has children from a previous marriage. In all three cases I'm referring to the assets were gone within a few years -- well, at least they were gone from the trust despite language that should not have permitted this.
In the other case involving a minor beneficiary, the trustor appointed his own brother as trustee upon his death. Because of the trust the trustor placed in his brother, he did not write stringent safeguards into the trust instrument, nor did he share the actual trust document with his ex-wife and guardian of the beneficiary. The new trustee, the brother, decided to invest the trust's assets in his own business, incrementally over several years, and when it was all gone the business went belly-up -- five years before the minor would have reached majority and been paid annual annuities.
In three of the four cases there were no regular strict accountings required to be reported to the beneficiaries. In the one case where there were such requirements, the spouse trustee kept the actual trust instrument secret, sharing only an incomplete summary document, and never complied with the stipulated requirements. The trustor never shared the trust instrument with the beneficiaries and thus, in ignorance, they stood by and watched a step-mother squander their inheritances.
From these examples I believe there are two minimal safeguards to the intent of the trust. First, provide a copy of the trust instrument (and any amendments) to the beneficiaries. If they then witness irregularities they have a basis for legal action. Secondly, mandate regular (quarterly or at least annual) accountings of the trust's assets be reported by the spouse-trustee to the beneficiaries. Then, if no accounting is made as stipulated, the beneficiaries can force compliance through threat of legal action. A lawyer won't charge too much to write a prodding letter.
There are other, less obvious measures that could be included. I am only commenting on the two that would have protected the beneficiaries in all four cases I personally know. But I will mention one more.
When a trustor dies and a surviving spouse becomes sole trustee, if that spouse remarries or establishes a domestic partner relationship with a new person, loyalties regarding the trust will most likely dilute further. This is especially true if the surviving spouse is not the natural parent of the intended beneficiaries. The temptation to fund "starting a new life" with the assets of the trust will be great. It would therefore be prudent to provide a stipulation that any such new partnership arrangement trigger an immediate distribution of assets to the beneficiaries. I would seek a lawyer's advice on the wording of such a provision.
When you go about "putting your affairs in order" and if you use a living trust, take a page from the Ronald Reagan playbook and trust, but verify.
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