What is Estate Planning? Estate planning is the process of creating a plan for the distribution of your assets when you die. Your assets include all of your possessions such as your cars, clothes, books, electronics, furniture, life insurance, retirement accounts, stocks, saving/checking accounts, real estate, etc. Your estate plan should specify the people and organizations (church, university, non-profit, family foundation, etc.) you would like to give your assets to when you die.
The vast majority of Americans do not have an estate plan, and of those who do, many have an incomplete or ineffective one. An effective estate plan will create a smooth and systematic distribution of assets following your death. An effective estate plan will also minimize the costs and taxes associated with the transfer of your assets to the people and organizations of your choice following your death.
Three common estate planning approaches for passing assets to heirs at death are a will, joint ownership, or a revocable living trust.
1. Will
What is a will? A will is a document you create to list what you would like done with your possessions when you die. A will is also called a “last will and testament.” While a will can be a simple way to specify your wishes for your assets at your death, there are some limitations and drawbacks to only having a will. The American Society for Asset Protection has over three decades of experience helping people create effective estate plans. We typically utilize a living trust instead of a will to avoid probate. Probate is a court-supervised process of distributing a deceased person’s assets.
Many attorneys recommend their clients create a will without a living trust, which ensures the estate will go through probate. Why? Because attorneys do not always have their clients’ best interest in mind. The attorney wants to collect the legal fees associated with probate, and in some states, the attorney receives a percentage of all the assets that go through probate. Probate is time consuming, costly, and public. The only person that benefits from your estate going through probate is the attorney.
2. Joint Ownership
What is joint ownership? Joint ownership is a term used to describe when two or more people own real estate, cars, or other assets together. A common example of joint ownership would be a husband and wife that have the title of their car in both of their names. You can avoid probate by holding assets in joint ownership since the asset held in joint ownership will be owned by the surviving joint ownership without probate. There are several problems with this approach, however.
For example, a couple had built a farm worth several million dollars. They were told by an estate planner to own the farm in joint ownership with their four children to avoid probate. A few years later the parents and one of the children were killed in a car accident. As a result of joint ownership, the farm did avoid probate, with the three surviving children as joint owners. Since the assets went to the surviving joint owners, the spouse and children of the child that died were totally disinherited and they received nothing. In addition, whichever of the surviving three children who outlives the other two children will end up with 100% ownership in the farm; and the descendants of the other three children will be excluded. Even if there is a will which designates who is to receive the property, in almost every instance, property held in joint ownership goes to the surviving joint owner(s).
The following is another scenario that shows the dangers of joint ownership and using a will as your estate plan. A couple, Ed and Mary, had three children when Mary died. Ed eventually remarried and had a fourth child, Tom, with his second wife. Ed had a will that specified his wishes for his estate to go equally to his four children. However, all of Ed’s assets were owned in joint ownership with his second wife, so all the assets went to her on his death. Upon Ed’s death, the second wife, as the joint owner, became the sole owner of the complete estate and instituted a plan to have all the assets go to her only child (Tom) on her death, completely excluding Ed’s other three children. Ed’s wishes in his will for his assets to go equally to all four of his children went tragically unfulfilled.
For these reasons and other lawsuit protection issues not discussed in this article, the American Society for Asset Protection does not recommend using joint ownership as an estate plan to avoid probate.
3. Revocable Living Trust
What is a living trust? A living trust is a legal document created while you are alive for estate planning and estate succession. The assets in your living trust continue to be under your control and for your benefit while you are alive. The assets are distributed to the people and organizations of your choice at your death. A revocable living trust enables you to avoid probate, keep your estate private, and reduce or eliminate estate taxes. A living trust ensures your assets quickly transfer according to your wishes upon your death. With a revocable living trust, no court action is involved, and the property is distributed privately. Setting up and funding a revocable living trust enables you to effectively pass your assets to your heirs, and it is one of the most loving things you can do for your family. The revocable living trust is one of the key documents the American Society for Asset Protection helps clients create as a part of their estate plan.