Estate Planning Goals and Tools A Primer on Basic Estate Planning

This is a continuation from Who Will Get My Property at My Death.

Estate Planning Goals

Estate planning focuses on the disposition of your assets after your death, but it can also involve planning for the use of your assets for your care if you become unable to manage your own affairs during your lifetime. Your estate planning objectives may include the desire to:

• Make sure that assets are transferred to your intended beneficiaries;
• Reduce estate administration costs, such as attorneys' fees, executors' fees, and court costs;
• Reduce or eliminate federal gift, estate, and generation-skipping taxes;
• Protect beneficiaries from mismanagement and from the claims of creditors and ex-spouses;
• Discourage certain types of conduct; and/or
• Give incentives to beneficiaries to be productive members of society.

Basic Estate Planning Tools

There are many "tools" that you can use to implement your estate plan. Such tools include ownership of assets with a right of survivorship, beneficiary designations, powers of attorney, irrevocable living trusts, homestead declarations, but the foundation of a solid estate plan will be a will or a revocable living trust. Unless all aspects of the estate plan are coordinated, some of the "tools" can cause more problems than they solve.

Last Will and Testament

• Generally: A will is a document in which the maker, ("Testator" or "Testatrix") can direct the administration and distribution of his or her estate. When you prepare your will, you must specify the fiduciaries and the beneficiaries, which are discussed below. Your estate planning attorney will provide the relevant technical language relating to the administration of the estate and the powers of the fiduciaries.


• Advantages: A will has several advantages when compared to living trusts or asset ownership which is transferred by right of survivorship or under a contractual beneficiary designation.


• Nevada's minimum requirements are easy to meet. A formal will can be attested by two witnesses, who should not be named as executor or as a beneficiary. A handwritten will which has been dated, written, and signed entirely in the maker's handwriting is legally valid in Nevada.


• A will effects all assets that belong to you at the time of your death. No special form of ownership is required (although the will has no effect on assets which pass by operation of law or contract, as discussed in the introduction, above).


• You can designate alternate fiduciaries and alternate beneficiaries, which is difficult to do effectively under contract beneficiary designations and impossible to do under any form of joint ownership with a right of survivorship.


• A will is simpler than a revocable living trust, and is usually significantly less expensive to have professionally prepared. Because many attorneys expect to make money probating your will, their fee or hourly rate for will preparation may be less than their rate or fees for other legal work.


• Testamentary Trusts: If your will delays the distribution to one or more beneficiaries until they reach a specified age or some other event, your will includes a "testamentary trust". A will with a testamentary trust is not a "simple will", and the preparation costs can be similar to those for revocable living trusts. After the will is probated and the administration of the probate estate is complete, the testamentary trust receives the assets allocated to it. Testamentary trusts are subject to continuing court supervision beyond the probate proceeding. The Trustee has to file an accounting with the court annually, and a court hearing is required at least every three years (and sometimes every year). This results in continuing costs until the beneficiaries' shares are finally distributed.


• Guardianship and Probate: A will does not alleviate the need for a guardian and will require probate upon your death. If you become unable to take care of yourself or your assets, your will can name the guardian, but it does not alleviate the court-supervised guardianship proceeding. Upon your death, probate proceedings are required to transfer those of your assets which do not pass directly by law or contract. Court costs, executors' commissions, and attorneys' fees can consume five to seven percent of an estate, and even an uncontested probate takes about six months to complete.

Revocable and Irrevocable Trusts

• Generally: A trust is essentially a contract in which the person creating the trust (the "settlor", "grantor", or "trustor") transfers his or her assets to a person (the "trustee") who agrees to own, administer, and distribute those assets (the "trust estate") to designated persons (the "beneficiaries") according to the provisions of the written trust instrument ("Declaration of Trust" or "Trust Agreement").



• Types of Trusts: There are several types of trusts:
  
  
  • Testamentary Trust: A trust created under a will is a "testamentary trust", and it does not legally exist until the will is admitted to probate, the probate administration is completed (at least as to the assets passing to the trust), and the personal representative (executor or administrator) transfers the assets from the decedent's probate estate to the trustee of the testamentary trust, as directed by the probate court in a court order.
  
  
  • Living Trust: A trust created during the settlor's lifetime is an "inter vivos trust" or "living trust", and it comes into being as soon as the trustee owns assets under a written trust instrument that explains the settlor's intent and identifies the trust's beneficiaries.
  
  
  • Revocable or Irrevocable: A trust can be revocable or irrevocable, which is discussed below.
  
  
  • Oral Trusts: In some states, including Nevada, a trust can be created orally, but only under very limited circumstances. For serious estate planning, a trust should be in writing.
  
  
• Creation: As mentioned above, the person creating a trust is referred to as the settlor, grantor, or trustor. A trust is created when one or more assets are transferred to a trustee with instructions to manage those assets for the benefit of one or more beneficiaries. Only the assets that are owned by the trust or its trustee are subject to the trust, and so it is important that the trust be the owner or beneficiary of all assets to be governed by the trust. Many trusts fail for lack of assets, and many valid trusts do not govern all of the assets that should have been owned by the trust. Initially, for most revocable trusts, the settlor, the trustee, and the beneficiary are usually the same person, and the trust names successor trustees and successor beneficiaries. For many irrevocable trusts, the settlor is usually not the trustee. [Note: If the trustee and the settlor are the same person, the trust is usually created under a "declaration of trust". If the trustee and settlor are different persons, then the trust is created under a "trust agreement". In common usage, "declaration of trust" and "trust agreement" are used interchangeably.]



• Benefits: The primary benefits of a trust include one or more of the following:


• Avoid Probate: Assets held in the name of a trustee are not subject to probate upon the death of either the settlor or the trustee (even if the settlor and the trustee are the same person). The expense and delays associated with probate proceedings are avoided as to trust assets.


• Avoid Guardianship Proceedings: A trust can provide that the designated successor trustee will manage the assets and provide for the care of the settlor when the settlor becomes incapacitated or incompetent. A trustee can be directed to retain funds for beneficiaries who are young or immature, incompetent, unwise, or easily influenced by greedy people. This eliminates guardianship proceedings, including the annual court accountings required by law. If done properly, a beneficiary cannot compel an early distribution of--and his creditors cannot place a lien on--trust assets.


• Other Benefits: A trust can be used to consolidate all of the settlor's assets, including benefits from life insurance policies, retirement benefit plans, and other contracts. It can include provisions which optimize the marital deduction, charitable gifts, and generation-skipping transfers in order to reduce or eliminate a settlor's federal gift and estate taxes. A trust can be used as a form of a marital property agreement if established after a marriage, or it can help segregate separate property if established before a marriage. Trusts offer more privacy that wills since the will and all probate proceedings are part of the court records that are open to the public.


• Revocable or Irrevocable: If the settlor of a trust has the right to revoke or amend the trust, it is a "revocable trust", but if the settlor declares that he or she does not reserve the right to amend or revoke the trust, it is an "irrevocable trust". [If the trust is silent, whether the trust is revocable or irrevocable is determined under applicable state law. Nevada law presumes trusts to be irrevocable unless a right to amend or revoked is expressly retained.] A well-written trust document will clearly declare whether it is revocable or irrevocable. The difference between revocable and irrevocable sounds black and white, but the lines can be blurred quite a bit because some irrevocable trusts permit some changes, and some revocable trusts limit the changes that can be made. Almost all revocable trusts eventually become irrevocable, usually upon the settlor's death. The type of trust and the terms of the trust will depend on the purpose for which the trust is created. For example, either a revocable or irrevocable trust can avoid the need for probate and guardianship proceedings, but only an irrevocable trust can be used to exclude assets from a person's taxable estate for federal estate tax purposes or to exclude assets from the claims of a beneficiary's creditors. The basic, probate-avoidance trust will usually be a revocable trust.


• Trust Administration: The trustee administers the trust for the benefit of the beneficiary or beneficiaries as directed in the written trust document. For most revocable trusts, the settlor, trustee, and beneficiary are the same person, which means that during the settlor's lifetime there is very little difference between "administering the trust" and managing one's own assets. In most states, the trustee of a living trust operates without any formal supervision, but a court can take jurisdiction over the trust or its assets upon the petition of the settlor, the trustee, or a beneficiary. Court involvement ("judicial intervention") is usually only necessary when a dispute or question arises regarding the meaning of the trust document, the actions or proposed actions of the trustee, or the rights of one or more beneficiaries. Sometimes a judicial decision before a dispute arises can avoid or minimize the dispute. The trustee of a testamentary trust is usually subject to the supervision of the probate court that handled the probate of the will under which the trust was created.

Beyond the Basics

The will and the revocable trust are the basic estate planning documents. If your estate is subject to the federal estate tax, more planning may be beneficial. The next step is to go to the advanced estate planning materials.

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