A “Will” is the backbone of every estate plan. However, a Will is often insufficient to meet an individual’s entire estate planning needs. At its heart, every estate plan has as its primary purpose to ensure that a person’s assets are distributed according to that person’s wishes. However, a Will alone is often an inadequate tool to achieve that purpose. Other tools are often helpful and should be considered.
While there is no “one size fits all” approach, most people will benefit from a living trust. A living trust is a legal entity that is established by a written contract between a trustor and a trustee. The trust assets are held for the benefits of one or more beneficiaries. Oftentimes the same person will fill one or more of the roles of trustor, trustee, or beneficiary.
Unlike a Will, which is constrained by statutory formalities, a living trust is flexible because it is a creature of contract between the trustor and trustee. It has broad flexibility to decide who, when, and how benefits are to be distributed from the trust. Most importantly, a living trust allows the trustor/trustee to manage the trust assets for his own benefit during his lifetime. If that person becomes disabled, another person may be designated to step in and fill the role of trustee to manage the trust assets.
A living trust is both revocable and amendable. Thus, the trustor can either terminate or modify the trust. This gives the trustor the flexibility to change the trust as circumstances change. A living trust is also much better than a Will at anticipating the “what ifs” in life. For example, what if a beneficiary dies before the trustor, what if the beneficiary is a minor at the time he is eligible for a distribution, or what if circumstances change and it becomes appropriate to benefit some beneficiaries more than others? A living trust also allows the trustor to set the age(s) at which the beneficiaries will receive distributions. Until the beneficiaries reach those threshold ages, the trust assets can be held, invested, and managed by the trustee. Wills do not allow that flexibility.
Other benefits of living trusts over Wills are that living trusts can create certain estate tax benefits, are more private than Wills, and are generally not subject to court supervision.
Wills do not control the disposition of assets that are already subject to a beneficiary or pay-on-death designation. In fact, the federal rules governing most retirement plans generally require that retirement assets be disposed of at death by beneficiary designation. Pay-on-death designations are commonplace (but not required) in bank and brokerage accounts. The person’s Will cannot override those designations! Accordingly, every estate plan involving retirement assets (such as 401(k)s IRAs) must carefully consider whether beneficiary and pay-on-death designations are properly completed or should be changed. In certain (but not all) circumstances it may be advisable to designate the person’s trust as the pay-on-death beneficiary/payee.
Joint Tenancy/Joint Accounts
Under a joint tenancy or joint account arrangement, two or more persons own the asset. If one of them dies, the survivors become the owner of the interest formerly owned by the dead person. The person’s Will cannot override joint ownership! Accordingly, every estate plan involving assets held in joint tenancy (such as real estate and bank accounts) must carefully consider whether the joint tenancy arrangement should be changed or terminated.