Trust and Estate Planning & Law

Trust and estate planning is an important part of financial planning. The number of people who own primary residences and who have invested in real property has increased greatly over the years. Further, the general public has become more sophisticated about investing, due in part to the fact that many people contribute to employer-sponsored investment plans. Thus, it is important for individuals to plan for their retirement, for the possibility of becoming mentally or physically impaired, and for the distribution of their estate and assets after death. Trust and estate law continues to be one of the growing areas of legal practice and will continue to grow as the baby boom generation enters into retirement. Moreover, there will be a tremendous transfer of wealth as that generation passes on. This article presents an overview of the basics of trust and estate law as well as a brief discussion of the issues that can arise with respect to disposing of estate property.

Keywords Administrator; Alternative Dispute Resolution (ADR); Beneficiary; Estate; Executor; Guardian; Irrevocable trust; Probate; Revocable trust; Trust; Trustee; Will

Law > Trust & Estate Planning & Law

Overview

An estate includes all of a person's property: an owner-occupied primary residence and other real estate, cars and furniture ("tangible personal property"), and insurance policies, bank accounts, stocks and bonds, and social security benefits ("intangible personal property"). The purpose of estate planning is to manage the estate when a person is alive in order to arrange for the estate's disbursement after a person dies. The first step in estate planning is for one to prepare a last will and testament. A will is a revocable document that establishes how one's property should be transferred upon one's death. In addition to wills, there are other investment vehicles that transfer a person's property. These include pensions, jointly owned property, gifts, and trusts. Moreover, life insurance policies and certain bank accounts that contain a right of survivorship take effect when a person dies.

All aspects of financial and retirement planning should include estate planning. Estate planning should also include a plan for the possibility of mental and physical incapacity. One way to achieve this is by establishing a trust. Essentially, a trust establishes a legal relationship in which one party assumes control of an estate or assets for the benefit of another. This allows a person to select someone to manage their estate while they are alive by designating a trustee who is responsible for holding and managing property for the benefit of the beneficiary. There are different legal and tax implications that apply to wills and trusts, and a person considering trust and estate planning should consult with an attorney and a tax accountant.

Applications

Validity Requirements

In order for a will to be considered valid, there are certain basic legal requirements.

• First, in most US states, a person must be eighteen years of age, although this can vary (an attorney can verify the applicable state law in this regard).
• A person must also be of "sound mind and memory" to draft a valid will. This means that a person must be aware of the fact that he or she is executing a will, and of the property included therein. This is especially relevant today as more people are being diagnosed with Alzheimer's disease or other forms of age-related memory loss or dementia. Any question concerning the mental capacity of the person making the will, or the testator, at the time the will was executed, can result in the will being contested during probate.

Probate is the legal process that verifies the validity of the document and allows for the legal distribution of the assets or property included in the will.

• A will must also include specific language that disburses the person's property and verifies that the person intends the will to be their final word in that regard.
• Further, the document must be signed by the person unless they are incapable of doing so because of illness, injury, or illiteracy. In such cases, a lawyer, a person appointed attorney-in-fact, or a witness can sign on the person's behalf.
• The will must be properly executed and witnessed (usually by two people). The witnesses, moreover, cannot be family members, beneficiaries, or business associates. That means that the witnesses must be "disinterested parties."
• Finally, the will should include a clause attesting that the document is the person's "final will and testament," and the will should be dated, notarized, and also indicate the place of signing.

There are also other legal matters to consider.

• The state law that governs a person’s will is the state where the person maintained their primary legal residence; this is also referred to as "domicile." If a person dies without having established a will, the property must still be distributed. (This is referred to as "intestacy" or that a person died "intestate.") In such cases, an interested party who may have a beneficial interest in the decedent's property can petition the probate court to be appointed as the estate's "administrator."
• When a person dies with an established will (also referred to as "testate"), a person is appointed to be responsible for ensuring that the directions of the will are followed. Such a person is known as an executor. In either case, whether someone dies testate or intestate, the executor or the administrator, respectively, is responsible for disposing of the estate property.
• Finally, there are certain kinds of property that are not transferred in a will, and this includes, but is not limited to, property that is jointly owned, life insurance that has a designated beneficiary, and property held in a trust.

Trusts

A trust is another effective planning tool in estate planning. As indicated above, a trust establishes a legal relationship with a "trustee" who holds property for the legal benefit of the beneficiary. In a living trust, the person establishing the trust can also be the trustee as well as a beneficiary of the trust; a living trust is usually established as a means to avoid probate.

In addition to holding property, the trustee is responsible for safeguarding the trust and distributing the trust income or principal to beneficiaries as required by the trust document. Any type of property, that is, real property, personal property, money, stocks and bonds, and even business interests, can be held by a trust. While there are many types of trusts, they fall under two broad categories, revocable or irrevocable. A revocable trust is one in which the terms can be legally changed. A revocable trust can be terminated by unilateral action of the person establishing the trust without court approval. An irrevocable trust is one that cannot be terminated without formal approval by a court with jurisdiction. The terms of an irrevocable trust also cannot be modified without such approval.

In either case, the trustee takes legal title to the trust property while the beneficiaries have an "equitable title interest" (such an interest simply means that beneficiaries have a legal interest to the trust’s assets as set forth in the trust). In addition to taking title to the property, the trustee is required to manage the property in accordance with the terms of the trust. The beneficiaries can assume ownership in a number of ways, all of which must be specified in the trust document. For example, if the person who established the trust dies, and property has been bequeathed to a beneficiary and the beneficiary is capable of assuming ownership, the property will be transferred. In some cases, a beneficiary may not be capable of receiving the assets because they are a minor or because of a mental or physical incapacity.

In such cases, the beneficiary will be required to have a legal guardian. A trust often includes directions in this regard and appoints a guardian, but in the event the trust does not contain directions for this circumstance, the court will need to appoint a guardian. Either the trustee or a "successor trustee" (an individual who assumes responsibility in the event that the trustee resigns, becomes incapacitated, or dies) must petition the court to have a guardian appointed. Another way a beneficiary can assume ownership of assets or property that are retained in a trust is by becoming of legal age. In many cases, a trust is established where assets are automatically transferred when those beneficiaries reach legal age.

Testamentary Trusts

There is another kind of trust that includes both elements of a will and a trust. This is known as a "testamentary trust." In this scenario, a person retains ownership of the trust during his or her lifetime and, upon their death, legal title to the estate property transfers to a trustee, who is then responsible for distributing assets and property to heirs and other beneficiaries as directed by the terms of the trust.

Claims against an Estate

An overriding legal issue of trust and estate planning concerns claims against an estate. In addition to determining who are the qualified beneficiaries of an estate and the conflicts that may arise among those beneficiaries, another legal matter to consider are creditors' claims against the estate. In short, creditors often have rights and claims against an estate. While such claims are usually a matter of state law, there has been significant case law on these matters over the years that established a statute of limitations for creditors' claims against an estate, as well as the means for notifying creditors when someone has died. A statute of limitations with respect to creditors' claims refers to the time a creditor has to file a claim against an estate before the claim expires. Generally, that time period is twelve months once an estate has been opened, and that is an interesting legal nuance. The fact that a person has died does not necessarily mean the required legal action to dispose of the estate automatically occurs. In order to open an estate, the probate court must initially be petitioned, and there is no specific time set forth as to when that should occur. Of course, it is probably more expedient and in the best interest of the beneficiaries to open an estate quickly, as tax considerations and third-party claims against an estate may necessitate a delay in opening the estate. Moreover, the minimal requirement for notifying creditors of a death is for notice to be made publicly. So the onus is on creditors who may have claims against an estate to be aware of public death notices.

Further, as society has become more litigious, lawsuits among family members, heirs, beneficiaries, and other interested persons have increased. There was a time when disputes among family members who were dissatisfied with the terms of a will or trust would resolve those differences among themselves; however, it is more likely today that these disputes will be resolved by the courts.

In light of the myriad claims that can arise against an estate by third parties such as creditors or interested persons such as family members, business partners, silent owners, or other investors, the legal and administrative expenses in connection with disposing of an estate have also increased. One way to mitigate these expenses is through alternative dispute resolution (ADR).

Alternative Dispute Resolution (ADR)

Generally, ADR is a means for resolving legal disagreements without pursuing legal action before the courts. There are three general types of ADR: negotiation, mediation, and arbitration. Essentially, parties that agree to an ADR arrangement waive their right to pursue an action before the courts and agree to resolve their disputes before a qualified third party, sometimes known as a mediator or arbitrator. Although ADR is a relatively new trend, especially with respect to disposing of estates, it is becoming more common since litigation over trusts and estates, and claims against other wealth transfers (e.g. life insurance policies and bank accounts) are on the rise.

Trust and estate planning is seeing an increase in the use of ADR. The way to achieve such resolution of disputes is by including a clause in a will or a trust agreement that states any claims or disputes brought by interested parties (i.e. heirs and beneficiaries or other interested parties) will be resolved through ADR proceedings. The benefits of alternative dispute resolution are twofold. ADR can serve to reduce the acrimony among the interested parties that can sometimes arise in formal legal actions, since litigation can often be an adversarial endeavor. When a person dies, people can react in a myriad of ways in such an emotional time, so ADR can also alleviate the tension among family members. Moreover, ADR is a more expedient route since ongoing litigation can be time consuming, and since the ultimate resolution will usually mean paying attorney's fees on a contingency basis from the proceeds of an estate, the cost of ADR will be far less than court proceedings, and the wealth that was intended to be transferred will be better preserved, which is the main goal of estate planning.

There are many legal issues to consider in connection with trusts and estates. Wills, trusts, and estates are governed by the state where a person is domiciled. While the laws in this regard have specific parameters and guidelines for establishing wills and trusts and for verifying the validity of those documents, legal claims against estates will inevitably arise.

Viewpoints

Reasons for Creating a Will

Based on the foregoing analysis, there are valid reasons for a person to have a will, regardless of the amount of real and personal property he or she may have.

• First, if a person dies intestate, the property must still be distributed. In such cases, the state will take responsibility for this, and state courts make certain assumptions with respect to the transfer of wealth. In many cases, immediate relatives will be given priority over married persons and "domestic partners."
• Further, if an interested party seeks to be appointed as an administrator, they most likely will need to seek out legal counsel. Oftentimes the legal expenses incurred will be greater without a will than if a will had been established.
• By having a will, a person can retain control over how their estate is disposed. The appointment of an executor will ease the burden on grieving family members or other survivors since the executor is a responsible party who has an obligation to implement the directions of the will.

Hopefully, the person who has been appointed executor will have some knowledge, if not expertise, in financial planning and will be competent in disposing of the estates assets. Not only should an executor have knowledge, a person named as executor should be responsible and trustworthy and so will act in the interests of beneficiaries.

If there is an executor in place, the beneficiaries will receive their portion of the estate's proceeds more expediently. This is of serious concern if any of those beneficiaries have special needs. There may be children involved who have physical or mental disabilities that were previously covered under the decedent's health insurance. Now that the person is dead, having a will can arrange for how those needs are to be met or who will assume responsibility for attending to those needs. Another issue that arises is "guardianship." If someone dies and leaves minor children as survivors, and the children do not have another parent, a will can arrange for the appointment of a legal guardian.

In the event a person dies intestate, someone who seeks to be appointed as administrator may not have sufficient knowledge and may have interests that run counter to those of other beneficiaries or interested parties. Finally, in some cases, a person's estate may include business interests. By having a will one can ensure that the business will continue if that is what is desired. In this case, the will should appoint responsible individuals if these matters have not already been considered by virtue of other legal mechanisms (such as board of directors resolutions of incorporated entities). There may be business interests that need to be disposed of as well as creditors' claims apart from those that could attach to the estate.

Reasons for Establishing a Trust

In conjunction with having a will in place, there are also many valid reasons for a person to establish a trust.

• First, a trust can establish procedures for the maintenance of a person's assets and property in the event of accident or illness that does not result in death. As our society ages, many of us must confront the possibility that we will become ill or suffer a catastrophic health crisis that leaves us unable to manage our affairs. Establishing a trust offers additional protection in any event.
• Further, establishing a trust enables a trustee to manage estate property more efficiently if an individual's family members are not capable of doing so.
• Additionally, a trust can protect a person's privacy since a trust is a private document, whereas a will is a matter of public record. This has changed somewhat as there are instances when a trust may be required to be recorded (e.g. when a person seeks financing on real property held in trust).
• Establishing a trust has certain tax benefits. A living trust, for example, will enable an individual to avoid probate and in so doing the expenses associated with transferring the estate upon death will also be mitigated.

Conclusion

Ultimately, a sound approach to financial planning is one that includes sound trust and estate planning. Having a will ensures that one's estate will be properly managed in the event of one's death, while establishing a trust will provide additional benefits and enable a person to better manage the estate while living. In short, effective estate planning requires a certain amount of sophistication from the people involved, and the need for consultation with qualified professionals, such as attorneys and tax accountants, is clear.

Terms & Concepts

Administrator: Person appointed by the probate court to administer an estate in the event the decedent does not have a will.

Alternative Dispute Resolution (ADR): A means for resolving legal disagreements without pursuing legal action before the courts. There are three general types of ADR, negotiation, mediation, and arbitration.

Beneficiary: Person who is to receive the assets of a will or trust as directed by legal documentation.

Estate: Anything a person owns, whether real property, personal property, and tangible and intangible property.

Executor: A person or persons named in a will to be responsible for ensuring the directions of the will are carried out.

Guardian: A person appointed by the court to have legal responsibility for a minor child.

Probate: The legal process that verifies the validity of a will and allows for the distribution of the estate assets.

Trust: A legal relationship where one person, the trustee, holds property of any kind for the benefit of another.

Trustee: Person appointed by the trust to take title to the property specified in the trust.

Will: A legal document that establishes how the property in a person's estate will be dispersed upon their death.

Bibliography

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Gardner, R., Daff, L., Dymond, L., & Welch, J. (2013). The new estate planning dilemma: simplicity or asset protection? Journal of Financial Planning, 26, 42–43. Retrieved November 22, 2013 from EBSCO online database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=88042068

Holbrook, D. (2005). As luck would have it: Evolving law on creditors' claims in an estate. Tennessee Bar Journal, 41, 30-40. Retrieved December 4, 2006, from http://tba.org

The American Bar Association guide to wills and estates. (2005). Washington, D.C.: The American Bar Association.

Jurinski, J. J., & Zwick, G. A. (2013). Why tax minimization is overrated in estate planning. Journal of Financial Service Professionals, 67, 53–61. Retrieved November 22, 2013 from EBSCO online database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=85802248

Parthemer, M. R. (2013). Like a bad penny . . . making sure an ex-spouse doesn’t reappear in the estate plan. Journal of Financial Service Professional, 67, 15–16. Retrieved November 22, 2013 from EBSCO online database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=91762068

Suggested Reading

Bisset, W. B. (2013). Understanding the impact of the digital age on estate settlement. Journal of Financial Service Professionals, 67, 54–63. Retrieved November 22, 2013 from EBSCO online database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=89934874

Laing, S. (2005). Some home truths for risk advisers. Money Management, 19 14-15. Retrieved January 11, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=19444130&site=ehost-live

Moldenhaeur, R.C. (2006). Building an estate planning practice using smarter seminar marketing. National Underwriter/Life & Health Financial Services, 110, 14-26. Retrieved January 11, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=21333101&site=ehost-live

Silverman, R.E. (2006). States court family-trust business. Wall Street Journal Eastern Edition, 247, D1-D2. Retrieved January 11, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=21273680&site=ehost-live