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SMART INSIGHTS FROM PROFESSIONAL ADVISERS

How Wills and Trusts Work, and Where to Start

Dealing with the death of a loved one is hard enough; estate planning can make things easier on a grieving family.

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A recent study shows that a majority of Americans — 56% — die without a will or estate plan. The importance of creating and updating a will cannot be understated.

SEE ALSO: Quiz: What Do You Know about Wills and Trusts? Test Your Estate-Planning Smarts

One of the most overlooked parts of the aftermath of the 9/11 attacks involved wills. The median age of the thousands of people killed in the World Trade Center was 39, an age group where people are less likely to have wills than older Americans. More than two-thirds of the victims of that terrorist attack were men. Many of them did not have wills, ensuring court battles could last for many years even after the physical scars have been erased. It’s a powerful and sobering reminder about the importance of estate planning.

Bill Wollard, an estate planning lawyer in Texas, has been helping families with their estate plan documents for a quarter of a century. He shared his insights to help families understand the importance of estate planning and the documents needed. Of course, please consult an attorney in your specific state for your options regarding legal documents and estate planning.

Q: Why is it that the majority of Americans have not done the basic legal planning needed for their families?

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Bill Wollard: People as a whole procrastinate, meaning they put off dealing with these decisions. People plan their vacations better than they plan their estates. Planning a vacation is a lot more fun than planning for your death or the possibility of becoming incompetent and unable to make decisions for yourself. Morbidity planning is not something we want to think or talk about. Many people tell me that they will do this type of planning when they get older, but I see people in their 80s who have not done it. Death and incompetence do not have a defined age.

Q: How do you recommend a family begin?

Wollard: Think of it in two basic phases. The first phase is the death side of legal documents, and the second phase is the living side of legal documents.

Q: What are the options for the death side of legal documents?

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Wollard: Everyone has three basic options for legal documents when they die:

  • Do nothing.
  • Draw up a will (either with a lawyer’s help or on your own).
  • Get a trust.
  • In the first option, if you do not have a will, you will die “intestate,” meaning you did not have a valid will in place. State law determines who will get your property. Your family loses control, and the court takes control. Dying without a will and having children from a prior marriage can complicate matters for the current spouse. I would prefer the state not decide how my estate will be divided and to whom it will go.

    The second option is going to an attorney, and creating a valid will based on what your state allows. Attorneys will know what your options are, as opposed to you trying to operate on your own. I do not recommend trying to create a valid will on your own because the details are important — if not executed properly, they could become the stumbling block in regard to how you want your estate distributed. In some states, individuals are not able to execute a will without an attorney being present.

    In both option one and option two, a will goes through probate. It has to because a will must be proved valid by the courts.

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    Q: Before you get into Option No. 3, quick question: Many attorneys say that probating a will is not that big a deal in their particular state. Is that true?

    Wollard: For some people, that’s true, however it really depends on where you live. If you live in a small rural county with one probate judge, then probate can be pretty easy. If you live in a larger metropolitan area like Dallas/Fort Worth with more than 7 million people in a four-county area, there is a longer wait simply because more people are waiting in line to go through probate. The will is also a public document, vs. a private document. A question I like to ask everyone is, “Would you prefer your estate to be public for all to see, or private for your family?” I have yet to hear someone say public.

    Q: So, what about Option No. 3: trusts?

    Wollard: A revocable living trust that is funded properly, while living, allows for the easiest settlement of the estate. That’s because the names have already been removed from the assets and retitled into the name of the trust. Many people think you will lose control if you remove your name, but that is not true. You are the grantor (creator) of the trust, and you are the trustee (controller) of all decisions for assets that are in trust. The trust “owns” the assets, but you still control and make all the decisions for assets in the trust. You pay taxes from your Social Security number because you are still alive. Homestead exemptions remain the same. Basically, you do business as you always have. The assets have simply been retitled or restyled in the name of the trust.

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    Q: Why does a will go through probate and a trust does not?

    Wollard: Simply put, a will must be validated by a probate judge. A properly funded trust has already removed your name from the asset. A trust is an entity, and it does not die like a person does. You would name successor trustees who would step into your place once you’re gone. They have full authority to execute what you have put in writing regarding your wishes. They can’t change your wishes, but they can execute your wishes. I prefer family control instead of court control of my estate.

    The purpose of the trust in its simplest form is to avoid probate and make it easier on the remaining spouse and heirs to settle. You just have to remember to retitle the assets to the trust and keep it funded as life moves along.

    Q: Should a trust be used in all circumstances?

    Wollard: No. I recommend wills for families who do not own property like homes, raw land or second homes. They have banking or investment accounts but do not own real estate. You can P.O.D. (pay on death) or T.O.D. (transfer on death) many accounts, but most states don’t allow that for real estate. A few states do allow that type of property to be T.O.D so each family should check with an attorney in their state. Understand, P.O.D. is not full-blown planning. It’s simply passing an asset down to the person you have named and not necessarily the blood line underneath that name. If you have titled property in one state or more, if you have been married more than once, then you should consider a trust.

    Q: You mentioned the living side of legal documents. What do you mean by that, and what are those documents?

    Wollard: These are documents that are good only while you are living, and they die when you do. You need to create what I call a pecking order or a list of people “in order” of those you want to make decisions on your behalf if you cannot make those decisions. These documents are to keep members of your family from having to go to court to be appointed your legal guardian. Guardianship can be an expensive and time-consuming hassle.

    The basic living documents that I recommend are:

    1. Durable power of attorney for finance.

    2. Medical power of attorney with HIPAA language.

    3. Living will, which basically can allow someone to remove life support.

    4. Guardianship document for adults, which appoints a guardian of your person and a guardian of your estate.

    5. Declaration-of-intent document, which states you intended to put all of your titled and non-titled assets into your trust.

    6. Certificate of trust, which clearly states who the trustees are now and who the successor trustees will be after you’re gone.

    The bottom line is the reason to do planning is to help make it easier on your family if you can't make decisions while living and, after you die, to make the estate settlement easier on your heirs.

    I have seen estates so messed up because of the lack of planning that spouses have actually said, “I’m having a hard time grieving for my spouse because of the mess that was left to us.”

    I often ask families if they prefer to make it easier on their loved ones or harder on them. No one ever says, “Harder!” If that is true with you, then you should consider doing some planning. You need to be clear in your direction and intention on who gets what and when they get it — and who does not get assets if disinherited. You do not want them to make up the rest of the story because you were unclear.

    Families often have told me that they were so thankful that proper planning was done. It was the best gift they could have ever been given, because it told them their loved ones were thinking about them in advance.

    See Also: An Overlooked Way to Pass Down Your Home Without Probate: The Life Estate

    Investment advisory services offered through AE Wealth Management, LLC (AEWM). AEWM and Strategic Estate Planning Services, Inc. are not affiliated entities.

    Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. This article was written for informational and entertainment purposes and should not be construed as advice designed to meet the particular needs of an individual’s situation. The topics discussed may not be appropriate for all individuals and cannot guarantee specific legal results.

    Kevin Derby contributed to this piece.

    Mark Pruitt is the president and CEO of Strategic Estate Planning Services, Inc. Based out of Dallas, Texas, he serves on the National Summit Advisory Board and is a speaker for the National Association of Insurance and Financial Advisors (NAIFA). Mark was selected as National Advisor of the Year by Senior Market Advisor in 2012. He is an Investment Adviser Representative and insurance professional.

    Comments are suppressed in compliance with industry guidelines. Click here to learn more and read more articles from the author.

    This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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