How would you like to give your state government all of your money and the authority to decide who would raise your children in the event of your death?  Well, if you are like 70% of the people in America who do not have a valid will or trust, that is exactly what will happen when you die (see More on Wills & Trust).

A will names the guardian to whom you entrust your children if both you and your spouse die.  The key here is if you BOTH die without a will (called intestate).  Even if all of your possessions are in joint ownership with right of survivorship this does you no good if you both die at the same time, such as in a auto accident.  A will also gives instructions on how to handle and distribute all of your worldly possessions.  If you have children who are minors, a will is a necessity.  If you don't have kids, a will still makes good sense.  No matter what your net worth is, it is poor stewardship of what God has entrusted to you if you don't have a plan for the provision of your minor children and/or the distribution of your personal property after your death.

Death is not an option, it's a fact.  A small amount of time and money invested now can result in a huge savings in time, money, and grief (for your loved ones) later.  You can only decide how and where your assets will be disbursed while you are living.  Soloman's admonition is one we should all keep in mind:  "When there is a man who has labored with wisdom, knowledge and skill, then he gives his legacy to one who has not labored with them.  This too is vanity and a great evil."  (Ecclesiastes 2:21)

Estate planning can be very complicated (depending on your specific needs) and requires that you seek the advice of a professional prior to making any important decisions.  This section is designed to equip you with a basic understand of wills and trust and encourage you to take action in this important area.  It is only a brief overview.  For further study and education in the area of wills and trust see the LONG-TERM links.  Below are the answers to some basic questions about wills and trust. 

• What are the requirements for preparing a will?

• What is a trust?

• Can a living trust keep me from paying taxes?

• What is a living will and medical powers of attorney?

• What about taxes?

• More on Wills & Trust: "Good Will Hunting"

What are the requirements for preparing a will?

In order for a will to be valid, it must meet the legal requirements of your state of primary residence.  For example, the laws for validating a will vary from state to state, usually requiring two or more witnesses.  The process of determining a will's validity is called probate, which means to prove or to testify.  It is a good idea to use more witnesses than the law requires, just in case one or more of the witnesses have died or cannot be located when your will is probated.  If your will is challenged and the legal number of witnesses cannot be located, your will may be declared invalid.

The law does allow a person to prepare his or her own will.  One example is a holographic will, which must be entirely in the handwriting of the person drafting it. However, if you draft your own will, you may be increasing the risk of it being contested or declared invalid.  High-quality, user-friendly software packages and will kits are also available on-line and in most bookstores for preparing wills, living wills, medical power of attorney and trust and are a much better option than doing a holographic will.  In all cases, you should have your will reviewed by a competent attorney to be certain it complies with the laws of the state in which you live.

Once your will has been completed, you should periodically review it and make the necessary updates when your circumstances dictate.  If changing circumstances require that you update your will, it is not necessary to make an entirely new will.  Instead, these changes could be made through the use of a codicil, or supplement.  The codicil is subject to the same laws of probate as the will, so it must be drafted properly, and only the original is valid in court.  If you have previous wills in existence, you should specify that your latest will or codicil supersedes all previous drafts.  

Attach all original codicils to the original will and store them together.  The original copy should be kept in a safe location, such as your attorney's office or maintained in a secure file with other important papers.  It is not always a good idea to store your original wills in a safe deposit box.  Depending on the state in which you live, your bank officer may or may not be allowed to enter your safe deposit box.  If you live in a state that does not allow a bank officer to enter your safe deposit box, then you will need to authorize another person.  Otherwise, a court order may be needed to enter it which could delay the probate process.  

One last concern in the creation of a will is the executor.  The selection of an executor(s) is a very important function.  You should select an executor with the same degree of caution you would if he or she were your own guardian.  A common misconception is that the executor is simply a legal requirement that anyone can satisfy.  Just the opposite is true.  The primary responsibility of settling an estate falls on the executor not the attorney.  

The duties of an executor might include:  locating the will and studying it, conferring with the attorney who drew the will, locating witnesses and notifying creditors, locating all the decedent's property, obtaining all canceled checks for the past several years, authorizing appraisals for real estate, evaluating leases and mortgages, filing an income tax return for the deceased person, filing estate tax returns, preparing information for the final accounting (including all assets, income, and disbursements), and disbursement of estate assets as specified in the will.  

Often your spouse is the best selection for the position of executor.  An alternate executor such as another family member, a CPA, or an attorney who is familiar with your circumstances and assets and knows where you keep important documents can be named that would be willing and able to take over if the spouse can't serve.  You could also select a third alternate, such as a major bank with a trust or estate department that you know could serve if all the alternates failed.  

Executors are often compensated for their work.  If you and the executor agree that there will be no compensation then you should specify that in your will.  When you die without a will, the court will appoint an executor for your estate.  Depending on the state allowance, a court appointed executor could be allowed to receive a percentage of your estate as compensation.

What is a trust?

A Trust is an entity for owning and managing assets.  A Trust is created when an individual (grantor or settlor) transfers part of his assets to another person or corporation (the trustee) to control and manage on behalf of a further specified individual or group of individuals (the beneficiaries).  You create a trust, transfer assets into it, and choose a trustee to manage the assets and disburse them to beneficiaries.

There are five (5) basic categories (types) of trust:

1. Discretionary Trust - This is the most common form of Trust.  The trustees retain discretion with regard to the administration of the Trust including investment of the trust funds and distributions to beneficiaries.  The settlor generally provides the trustees with a letter of wishes, that sets out for the trustees the manner in which the settlor wishes the Trust assets to be dealt with both during his lifetime and after his death.  The settlor can amend this letter at any time.

2. Protective Trust - This is a Trust where the beneficiary has a life interest and which ends (or becomes a discretionary trust) if certain events (commonly including the bankruptcy of the beneficiary) take place.  At the occurrence of such an event, the income of the property is applied at the absolute discretion of the trustees for the beneficiary or his family, the beneficiary no longer having any right to receive the income himself.

3. Fixed Interest Trust - As the name implies a fixed interest Trust defines the interest that each beneficiary can have and these constraints may not be varied by the trustees.  This provides certainty to all parties at the cost of the flexibility.

4. Accumulation and Maintenance Trust - An accumulation and maintenance Trust is a gift of assets usually where the beneficiaries are the settlors children and the right to participate in the accumulated income from the trust depends upon the beneficiary attaining a certain age.

5. Purpose Trust - A purpose trust does not have beneficiaries and is established to achieve a specific purpose.

A Trust can be intervivos (during life) or testamentary (at death).  Just as the name implies, an intervivos Trust is drafted and implemented during a person's lifetime.  These Trusts are also referred to as living trusts.  In contrast, a testamentary Trust is set up to begin when a person dies.

A Trust may also be revocable or irrevocable.  If it is revocable, the trustor (Trust maker) reserves the right to modify or even cancel the Trust and to remove or substitute property as long as he or she is alive.  An irrevocable Trust means exactly that; it is irrevocable and cannot be changed once established.  In addition, property assigned to the Trust cannot be recovered by the trustor, who is bond by the terms of his or her Trust.

Generally speaking, assets held in a revocable Trust are still the property of the trustor and, as such, are subject to federal and state inheritance taxes (although they would bypass probate costs).  Assets held in an irrevocable Trust are not part of the decedent's estate.  Therefore, they are not subject to federal or state inheritance taxes.  However, assets assigned to irrevocable Trusts may be subject to gift taxes if they exceed the annual or cumulative exemptions.  Unlike wills, living Trusts are "private" documents and, as such, do not require probate.  As a result, the terms of the trust won't be available for the public to read. 

If you feel you need a Trust to help protect your estate assets, always consult a competent estate planning attorney. (see Tax Saving AB Trust)

Can a living Trust keep me from paying taxes?

There is a lot of buzz about living trust and the ability they have to shield you against the tax man.  The key to keeping property out of the taxable estate, with our without a trust, is that you must give up both control and the right to receive personal benefit (no strings attached).

"Keeping property in a Trust and out of your probate estate does NOT mean you pay no income tax on income from the asset.  Nor does it mean the asset is out of the taxable estate for federal estate tax purposes.  To accomplish tax savings of either kind, a variety of more complicated, irrevocable Trusts are available.

For income tax purposes, whether or not a Trust will be recognized as a separate entity depends on the degree of control retained by the Grantor (settlor).  Basically, any meaningful, ongoing control over Trust property that one might want to keep, would make it a "Grantor Trust" under the tax code (E.g., The mere power to revoke makes any revocable Trust a "Grantor Trust").  "Grantor Trusts" are completely ignored by the IRS for income tax purposes.  The Grantor would be taxed as if the Trust property were owned in his individual name, and not Trust existed.

For estate tax purposes, the Grantor Trust regulations do not apply, but the "no strings attached" rule still does, and the result is basically the same.  A Trust can be drafted to enable the Trustee to handle a wide variety of future situations, but if it is intended to avoid inclusion in your taxable estate, it must be written in stone.  Certainly, any Trust that the Grantor can revoke will be included in his/her taxable estate.  Likewise, if the Grantor retains the power to change the terms of the Trust in any significant way.

The bottom line is simple:  To keep property out of the taxable estate - with a Trust or not - you must give up both control and the right to receive personal benefit."

What is a living will and medical powers of attorney?

Living wills and medical power of attorney are useful additions to a standard will.  A living will tells your doctor what, if any, life-support measures you would accept or would not accept.  A living will only covers physical conditions that are considered to be terminal.  Life-prolonging treatments that you may want to cover in your living will include respirators, kidney dialysis machines, ventilators and tub feeding.  Persons who don't want to remain on life support indefinitely may place a time limit on how long they would want to continue in a comatose or vegetative state.  Specific and clear instructions remove the emotionally devastating decision making responsibility from family members.

A medical power of attorney or Durable Power of Attorney for Health Care grants authority to someone you trust to make decisions with a physician regarding your medical care options (may vary from state to state).  Even if your state doesn't have a health care power of attorney, all states will allow you to execute a General Power of Attorney, in which you can appoint someone to handle your business if you become incapacitated.