When we die, everything we own must be distributed among the living. Aside from some relatively fringe exceptions where people have requested to be buried with all sorts of belongings, the dead cannot “own” anything per se, and as such, must pass property on to their loved ones and next of kin.
An estate plan is a set of documents that describes what, when, and how one’s belongings should be distributed after death, with a variety of options making no estate plan exactly the same as the next. Yet in most cases, estate plans do share one thing in common – the probate process.
The probate process involves the legitimization and execution of the will under the state’s supervision, at the hands of an appointed executor/administrator (usually a close family member). During the probate process, your loved ones must determine:
- The full extent of the estate (in size, scope, and value)
- Whether any remaining debts must be paid off
- How the rest of the estate is best distributed among those mentioned in the will
Should there be no will, the state will require an executor to follow intestate law. That means the estate is divided as per state law’s interpretation of next of kin. Only in extremely rare cases where no heirs or living relatives remain would any property be passed to the state itself.
How Does an Estate Plan Become a Public Matter?
When an estate is distributed via will or the state’s intestate law, probate is unavoidable. And as such, certain details of your estate plan will become a part of the public court records.
This means that, once probate begins, anyone can walk up to the county’s courthouse and ask to see the records of your probate case – thereby seeing the extent and size of the estate, whom you owed, and whom your heirs were.
But not all estate plans must be centered around a will. Estate plans vary in size and scope depending on the testator’s wishes and beliefs, as well as the extent to which they want to control the factors surrounding their passing.
Many estate plans do not simply determine who gets the car or who gets the jewelry, but they also determine what medical procedures you would like to avoid, whether you wish for extraordinary measures should you be permanently incapacitated, and much more.
While a will is arguably the simplest way to leave behind instructions on how to divvy up your estate, there are other options that can avoid probate – and thereby keep the details of your estate entirely private.
Trusts vs Wills
A trust is a legal entity created by a trust document. Three parties are involved in a trust – the grantor, the trustee, and the beneficiary. The grantor sets up and funds the trust with their property and assets.
The trustee manages the trust once the grantor is no longer involved. And the beneficiary is on the receiving end of the trust’s contents. These three parties do not have to be three separate people – but for estate planning purposes, they usually are.
The main feature of a trust is that anything funded into the trust is part of the trust’s assets, rather than your own belongings. What this essentially means is that, in part or wholly, you no longer “own” what is within the trust.
For estate planning purposes, this is useful as it means that anything held “in trust” cannot go through probate. Instead, it is automatically passed to a beneficiary via the managing trustee. Trusts and wills are not diametrically opposed.
A trust is yet another way to ensure that your belongings are left in the right hands after you die, and a well-crafted estate plan will make use of both trusts and a will to minimize costs and ensure that any assets or property gained in the interim between the estate plan’s last revision and your passing will be swept up into a trust.
What Is a Revocable Living Trust?
Trusts come in a variety of shapes and sizes. They are generally either revocable or irrevocable. Irrevocable living trusts are harder to undo or amend, and they separate you from your assets almost entirely. This means you cannot benefit from the privileges of ownership over a car or home you have funded into an irrevocable living trust.
However, because of this greater degree of separation, anything funded into an irrevocable living trust is typically also considered separate for your estate. This can help reduce the value of your estate and keep it within the bounds of the estate tax exemption limit, for example. Irrevocable living trusts offer other forms of asset protection as well.
A revocable living trust is more flexible, and while they lack the same element of asset protection, they are arguably easier to work with and have far fewer restrictions whilst still letting you keep your estate plan entirely private. The main benefit of a revocable living trust, then, is that anything funded into the trust will not have to pass through probate.
After funding your assets and property into a revocable living trust, you can continue to do with them as you please – including spend and invest them. Another added benefit of a trust is that it can be written to be distributed upon your permanent incapacity, rather than only upon death.
Alternatively, your trustee will be charged with managing and caring for your assets and property until you die, at which point they will distribute them to your beneficiaries. It’s important to note that there are exceptions to what can be funded into a trust.
However, these exceptions are usually assets and accounts that cannot pass through probate anyway, because of a clause that immediately transfers them to a designated beneficiary upon death. These exceptions include:
- Retirement accounts
- Life insurance policies
- POD bank accounts
- TOD vehicles and homes
Contact an Estate Planning Professional
While trusts can provide you with greater power over how your assets will be distributed once you die, all while keeping your estate private, they can still be quite complex to set up safely. There is little room for error in estate planning, and something as delicate as a trust requires a professional’s touch.
Consider contacting an estate planning professional before you make up your mind on how to set up your estate plan.