There are three basic ways for your assets to be transferred on your death:
- A Will, which is the standard method
- A Living Trust, which offers some advantages over a Will
- Beneficiary Designations, for assets such as life insurance, 401 (k)s and IRAs
If you die without either a Will or a Living Trust, state intestate succession law controls the disposition of your property that doesn’t otherwise pass via “operation of law,” such as by beneficiary designation. In such event, settling your estate will likely be more troublesome-and more costly.
The primary difference between a Will and a Living Trust is that assets placed in your Living Trust, except in rare circumstances, avoid probate at your death. Neither the Will nor the Living Trust document, in and of itself, reduce estate taxes-through both can be drafted to do this. Let’s take a closer look at each vehicle.
Transfers by Will
If you choose just 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.
- Notifications of Interested Parties
Most states require disclosure of the estate’s approximate value as well as the names and addresses of interested parties. These include all beneficiaries named in the Will, natural heirs, and creditors.
- Appointment of an Executor of Personal Representative
If you haven’t named an Executor or Personal Representative, the court will appoint one to oversee your estate’s administration and distribution.
- Inventory of Assets
Essentially, all assets you owned or controlled at the time of your death that need to be accounted for.
- Payment of Claims
The type and length of notice required to establish a deadline for creditors to file their claims vary by state. If a creditor doesn’t file its claim on time, the claim is generally barred.
- Filling of tax returns
This includes the individual’s final income taxes and estate’s income taxes.
- Distribution of Estate
After the estate has paid debts and taxes, the executor or personal representative can distribute the remaining assets to the beneficiaries and close the estate.
Transfer by Living Trust
Because probate is time consuming, public, and can be expensive, avoiding probate is a common estate planning goal. A living trust (also referred to as a “revocable trust” or “inter vivos trust”) acts as a Will substitute, although you should still have a short will, often referred to as a “Pour-over-Will”, to catch any property that fall through the cracks.
How does a Living Trust Work? You transfer your assets into a Trust for your own benefit during your lifetime. You can serve as trustee, select some other individual to serve or select a professional trustee. If you choose to be the trustee, the successor trustee you name will take over as trustee upon your death-serving in a role similar to that of an executor.
In nearly every state, you’ll avoid probate if all of your assets are in the Living Trust when you die, or if any assets not in the trust are held in a manner that allows them to pass automatically by operation of law (e.g. 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.
Essentially, you retain the same control you had before you established the trust. Whether or not you serve as trustee, you retain the right to revoke the trust and appoint and remove trustees. If you name a professional trustee to manage trust assets, you can require the trustee to consult with you before buying or selling assets.
The trust doesn’t need to file an income tax return until after you die. Instead, you pay the tax on any income the trust earns as if you had never created the trust. A Living Trust also offers additional benefits. First, your assets aren’t exposed to public record. Besides keeping your affairs private, this makes it more difficult for anyone to challenge the disposition of your estate. Second, a Living Trust can serve as a vehicle for managing your financial assets if you become incapacitated unable to manage them yourself.
Now that you have a basic understanding of how your property is transferred at death, you may want to consider how your affairs will be handled in the event of incapacity.