Wills and Trusts:What They Are And Why You Need Them

Wills and Trusts:
What They Are And Why You Need Them

Happy is the person who knows what to remember of the past, what to enjoy in the present, and what to plan for in the future.
-Arnold H. Glasow

As I mentioned, I grew up on a small family farm in central Ohio. My dad had bought the land and everything that went with it. Like many farms of that time, my family ran the farm while my parents worked jobs earning the money that supported us. The farm was not a hobby. It was a real working farm that had an even shot of paying its way each year and adding to the bottom line. That was the goal, and usually it worked.

Most of the money we made farming went right back into the farm, paying for capital equipment, new breeding stock, supplies and land. I helped with the farm through my early twenties. During that time, there was precious little extra cash. We had necessities, but not much else. We scrutinized every expense before anything was spent. We'd put off maintenance for equipment and infrastructure-such as fencing, doors, hardware, tools or an implement part-in favor of a cheaper temporary fix.

Our 102-acre farm was home to a herd of fifty head of cattle and two horses. But we used barbed wire strands to fix a hole in the fence, rather than replace the line of fence that was in disrepair. It cost less to fix the fence in this way, but it was not a permanent fix and it would last only a short while. If we were lucky, it would last a year or two, but it sometimes held for just a few months. However, the dairy cattle noticed the impermanence of our work. They became really adept at making their way through holes that had been patched with barbed wire. A couple cows became so good at escaping, we gave them nicknames to suit their achievements, such as "Houdini," "Missing," and "Over There." After spending many hours chasing after our wayward cattle, my father implemented a project of "riding the line": We'd drive the entire circuit of fences, searching for new holes opened by our innovative animals. We spent hours checking and fixing the fence.

I am certain our financial security could have been advanced substantially-along with our neighbor relations-if we had just installed proper fencing. But we didn't. Instead, we kept chasing after cows, driving the fences, and twisting barbed wire. Since then, I always wondered about the economies of "making do" because of the short-term costs. It seems that, eventually, the quick cheap fix is more expensive than doing it properly. It may be alright to do this to solve a problem until it can be addressed, but kicking the can down the road too much is expensive.

Nowhere is that more true, than in estate planning.

I can't count the number of times I've heard people tell me that estate planning was a luxury that they couldn't afford. Instead, their cheaper alternative is to go without. They take comfort knowing that, if something were to happen to them, their kids already have loving Godparents and Grandparents. As for their possessions, perhaps they've told some family members, "When I die, I want you to have ______." But they also just rely on the fact their family will automatically inherit everything, so why bother, really? What those people don't realize is they are just shifting their costs onto their heirs, and doing so at increased costs and at a difficult time that may have long term adverse consequences.

Without a thoughtful estate plan, a decedent's assets may become tied up in probate. If these are few in number, the process will likely exhaust the funds, and there may be an insolvent estate. If the assets are sufficient to support an intestate estate, the court proceeding can take years and thousands of dollars to complete. In the meantime, the estate heirs may get nothing or far less than would otherwise have been available.

Even worse, state laws spell out who gets what, and, usually, a court has no discretion to deviate from those laws to alleviate financial stress to the beneficiaries, or to avoid a dispute that arises; these disputes may be actual litigation or simply the effect of family fights. So, the decedent's promises to a relatives and friends may mean absolutely nothing.

Then there's the risk that fall on minor children. Designating someone as a Godparent has no legal force. States require a legally designated minor child's guardian. Without a designation of guardian that may be expeditiously executed, a child is a ward of the state until the process is completed, and a judge decides who shall be the child's guardian. As I said, a cheap fix is always the most costly in the end.

What then, are the options?

1. Last Will and Testament

The Last Will and Testament is the primary planning document specifying the transfer of property from a deceased person's estate to his beneficiaries.

It also can name a guardian for minor children or dependents, while providing other direction to courts for their care. (It may include a "Testamentary Trust" to provide for the minor's or dependent's financial estate.)

In order to protect the inheritance of rightful heirs, state law requires certain formalities that must be observed for a Will to be legally enforceable: state laws specify how the Will must be signed (or "witnessed"), in order to be effective after death. Laws on these matters vary from state to state.

Wills are always needed, no matter whether other methods of disposing of property are also used, because people commonly forget how they have "directed" their property at death using other methods of directing their property and they sometimes forget whether they have directed their property through contract, deed or title. In addition, some property has no title and needs to be directed through a Will or Trust if not already given during life. Wills can also be used to get missed property into the proper place (such as directed to a Trust), to make sure that the property is directed to the right recipients.

While other options are available, a Will is often the best choice if there are insufficient family resources for managing a Trust. Wills also may be more practical for younger clients, who are likely to have many later revisions of an estate plan, due to changes in family or acquisition of assets.

2. Trusts

Trust is a legal structure that holds the assets of a Grantor, on behalf of a beneficiary.

Trusts are used a method of transferring property on death, or managing property during life. The property can have been granted to the Trust during someone's lifetime, or at her death-such as in a Testamentary Trust (often included in a Will and Last Testament).

Because a Trust holds assets, rather than the decedent grantor or settlor, trust administration-and distribution of inheritance-is generally faster, cheaper and more private than a probate administration, though more expensive on the front end to set up, due to the added work. Therefore, choosing this method of directing gifts can conserve property for the Grantor's family and other beneficiaries. Typically, the initial cost of planning under a Trust is much less expensive than the expense of probating the decedent's property.

In addition, real property held out of decedent's state of residence sometimes presents issues that suggest that a Trust should be used to avoid an ancillary administration in the non-resident state.

Often wills that 'catch' property not directed to the decedent's trust have a provision where assets "pour over" from the Last Will and Testament into the decedent's Trust if the assets were inadvertently held in a Grantor's/Settlor's individual name at death. Though if used properly, the decedent's Trust will already have all the property at the time of death, and the Will doesn't have to be used.

3. Payments on Death and Transfers on Death

Another method of avoiding probate court, and skipping past a Will to dispose of property, is when a planner and their financial institutions have a contract where that the institution will use the planner's financial accounts to issue a Payment on Death, or POD, to certain named persons under a beneficiary clause in the contract. State law permits the transfer of these types of POD gifts without first probating the property on the owner's death.

The POD may go to a Trust. If that's the case, then the gift never goes into the deceased planner's estate, and it still avoids probate court; this plan can be a powerful way of using gifting and estate administration plans similar to a Will, but outside of probate, thus reducing costs of administration. This contract interest to make payment on death in some cases may be called a Transfer on Death, or TOD.

There is a similar method available of transferring real estate, however, it depends on state law. In Ohio, you may transfer real estate outside of probate through an affidavit for a death transfer of real estate, that, prior to death, is placed on file in the County Recorder's office. It operates to transfer the real property (real estate) to named beneficiaries on the planner's death, without a probate court.

One weakness of these methods of transfer by POD or TOD is that everything depends on the survival of the beneficiaries. If the beneficiary passes away before the grantor, then gift will fail. However, if the POD or TOD is to a Trust, then the Trust survives the death of the decedent, and the beneficiaries named may receive the property just as they would under a Will if they predecease the owner of the POD or TOD property.

Real Estate property may in some states not be permitted to transfer to a Trust, however, under a TOD, depending on the state law governing the transfer of real property in which the property is located.

4. Joint Tenants with Right of Survivorship

The terms "Joint Tenants with Right of Survivorship" refer to a type of ownership of property between two or more owners of the legal title to property. The word "survivorship" refers to the survivor's right to take sole legal title to the property on the death of their joint owner(s). Often, this is referred to in the title of bank accounts as "JTWROS," and it lists each owner by name on the institution's contract account with the joint owners.

This type of ownership should be reserved to persons intended to be an actual owner of the property prior to the death of other owner(s). This is due to the confusion about ownership during life, to prevent the unauthorized use of funds or property during the real owner's life, and to properly direct gifts on death of the real owner(s) of the property.

In some cases, people use a JTWROS for convenience, allowing someone else to act as a manager of a bank account or other property. However, on death, that "helper" automatically becomes the titled owner of the account; in addition, as referenced above, they also look like the real owner during the life of the owner.

Absent clear indications of a managerial relationship in the establishment of a JTWROS for the helper, which is a kind of "Trust" in actuality, the helper is difficult to dislodge from ownership; and the rest of the family or beneficiaries of the primary owner are either in a litigious situation or out of luck. There is also an inevitable family relationship problem that occurs in these situations. In such a case, a POA is a better instrument to use for the helper than ownership under title of JTWROS.

Wild Cards and Other Considerations

The above concerns and documents are often affected by unique aspects of a client's situation. These may include tax issues where the property is significant; family law issues, such as a blended family or situations requiring separate financial controls, gifting intent as between spouses to their families, or disability of a family member, to name a few.

As mentioned, wills are determined by state law. Therefore, it is important to consult with counsel when moving residence to another state, or if you have property in more than one state. While some states will honor a will prepared in another state, this is not always the case and depends on the circumstances of its creation and the domicile state law at the time of its creation.

If risk of litigation is present, there may be asset protection plans that should be used to protect the property for a family or an individual. Sometimes a Trust is used for this, and sometimes another type of legal entity may be useful, such as a limited liability company, partnership or corporation.

How property is held should be reviewed when planning. It may be held by the client under a title document, such as a bank or investment firm, or the asset may be held directly by the client. The property in question may be in a safe deposit box under a different name than the client's name.

There are really too many potential concerns of this type to list them all, and the discussion with the clients will hopefully flush out the issues and help resolve them. So, getting it done in advance is imperative in order to meet the contingency of an adverse event.

Like my boyhood management of the farm fences, lack of planning can result in a poor use of resources. In my case, I may have enjoyed the independence and spirit of adventure tracking down the animals loosed on the neighbor's property. However, there were other more productive ways of spending my time, and even I had the occasional surly reaction to these animals grazing on a neighbor's property. I doubt many will enjoy collateral benefits from failure to do their estate planning!