Wills, Living Trusts, and Lawyers
Many people assume that because their house is paid for and their child's name is listed on the deed as well as all as on their bank accounts, they don't need to bother with legal documents. Their children all know who gets what and all agree. Why should they go to the expense of having a lawyer draw up complicated documents?
Unfortunately, things aren't that simple. Even if your siblings all agree with what goes to whom and how everything gets divided evenly, the government is going to take a huge chunk of taxes out of the estate if proper financial planning isn't done ahead of time.
Without a health-care proxy or directive or a durable power of attorney, you may have to go to court to be able to make decisions for your parents. You may find yourselves trying to act in the interest of your mother who has suffered a stroke and is no longer able to communicate or your father's dementia, which has taken a turn and made him incompetent to make decisions. Without the paperwork, your opinions don't count and you may have to sit idly by while they suffer through procedures and treatments they never wanted.
A will is a legal document that typically lists and describes a person's assets, property, and personal belongings and how they are to be distributed after her death. It names a person to execute the will, pay taxes and debts due, and make sure that items are distributed according to the will.
A simple will can be drawn up by a lawyer for about $200. Anyone who owns a house or other assets, has children, or has a savings account should have a will. Each of your living parents or in-laws should have a will of their own, as joint wills can be complicated. Wills should always be kept up to date.
Codicil and Letter of Instruction
A codicil is an amendment to a will. Often when someone is cut out of a will, it is through a codicil. When a child marries or a grandchild is born, a codicil can be used to add them in, as opposed to rewriting the entire will.
A letter of instruction can be used along with a will (and codicils) to provide information about your parents' wishes such as what to do about their pets, family photo albums, business files and equipment, funeral and burial wishes, and an inventory of personal items that weren't included in the will. This inventory could include jewelry, furniture, diaries and personal letters, collections, and instructions on who is to receive these items.
This letter, although not binding, could include instructions to family members about how they should spend or invest their inheritance and what to do with items if there are disagreements between siblings.
Probate
Probate is the legal process of settling an estate and includes such things as paying off debts and taxes, inventorying assets, and distributing them according to the will and codicil. This process has a reputation for being lengthy and costly. The clarity of the will and the size of the estate have a lot of influence over the length and fees for probate. Most states have now streamlined the time and expenses for small estates for this process. You may need an attorney to assist with probate; however, it is possible to do this yourself in some states with assistance of the probate clerk.
Without a will, based on the laws of that state, the probate court will decide how to distribute any property and will appoint an administrator to oversee the closing of the estate. This could end up costing you a lot of money, as this administrator may charge up to 5 percent of the total value of the estate.
The will, along with codicils and letter of instruction, should be stored in a safe place and you should know where it is. It is not a good idea to put it in a safe-deposit box, as this may be sealed at the time of death. The lawyer could keep it, or it could be kept in a safe or strong box in your parents' home or with a state registry office.
Living Trusts
A living trust is set up in addition to a will. The trust cannot encompass all assets, and thus a will is still a necessary document. There are two types of living trusts. One is revocable and the other is irrevocable. These are both set up while the grantor is still living.
A will only covers assets that will be placed in probate. It does not cover items owned jointly by a surviving spouse, anything listed in a trust, or anything given directly to a beneficiary such as from a 401(k) or life insurance policy.
Living trusts have become much more popular because they can be set up to save the heirs by reducing estate (inheritance) taxes and possibly time and costs of probate. A living trust also protects privacy because assets are not passed through probate.
The revocable trust can be changed or cancelled at any time during the grantor's lifetime. The grantor manages the trust until such time as he becomes incapacitated or dies. At that point, the trustee steps in and manages or distributes the assets according to the grantor's wishes. The trustee in this type of trust is often a bank or other financial institution. Unlike a will, the terms of a revocable trust cannot be contested; courts have no control over them.
An irrevocable trust is a serious step because it cannot be changed or cancelled. Estate taxes are usually significantly reduced by this type of trust. However, beneficiaries are still subject to gift and capital gains taxes on assets, but these are usually far less than estate taxes.
The grantor specifies the terms of the irrevocable trust including appointing the trustee(s). This type of trust also protects the privacy of assets, as they don't pass through probate. It can also protect the assets from creditors.
Lawyers
Lawyers usually specialize in certain aspects of law such as criminal law, malpractice, tax law, contracts, or mergers and acquisitions. When choosing a lawyer to draw up a will, living trust, health-care proxies, or any DPOA (durable power of attorney), you need a lawyer who specializes in estate planning and wills and trusts. Just like you wouldn't see a gynecologist to take care of your heart condition, you need a lawyer well versed and qualified in wills and trusts to handle this task.
If you have a good friend who is a criminal attorney, don't ask him to help write a will. Instead, ask him for a recommendation of someone qualified to draw up trusts and wills or to point you in the direction to find a qualified estate-planning attorney.
For additional help see Appendix C. The IRS also has publications available on probate and estate taxes. Call 800-829-3676.
