The Right Estate Plan for You

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I met Mrs. Adams one day while I was on my lunch break.  I had decided to stop by a popular bakery for a cranberry-turkey sandwich -- one of my favorites.  While I waited in line, I noticed that the person in front of me was wearing a t-shirt from an organization I support, so I struck up a conversation.  When she asked me what I do for a living and I told her that I am an estate planning attorney, I got the same response that I get half of the time:  “My husband and I have been thinking about doing a will!”  We set an appointment to meet in my office a few days later before she left with her lunch order. 

When we met, I found that the Adams’s were an endearing couple, speaking in perfect turns, almost as though they had rehearsed everything before coming to our appointment. They explained to me that Mr. Adams had worked his way up to a management position in a small logistics company and Mrs. Adams had been a stay-at-home mom until their oldest child entered junior high a couple years ago and she picked up part-time work as a book keeper for a small business.

The Adams were doing their best to save for retirement while still taking care of their children’s needs.  By investing in a plan through Mr. Adams’s employer, they had managed to save almost $150,000 in a 401K.  They also owned a home currently worth about $200,000, although their mortgage wouldn’t be paid off for four more years.  In addition to those things, the Adams had two family cars, and an assortment of other personal property, all together worth about $50,000.  Mr. Adams also had a $500,000 term life insurance policy, and the Adams were expecting to one day inherit a parcel of land, money, and stock from their parents’ that will probably be worth about $200,000.  I quickly calculated that with their home equity, 401k plan, vehicles, and other personal property, the Adams currently had assets of just under $400,000.  After inheriting from their parents and if Mr. Adams unexpectedly passed away, their assets could be as much as $1,100,000

When I asked the Adams what was most important to them, Mrs. Adams told me that they had three main goals:  First, if anything happened to them, they wanted to provide for their youngest son and daughter who were currently high school students. Second, they wanted to take care of each other if either of them passed away or was disabled.  Third, they wanted to protect whatever money was left over after they passed away and give it to their children without causing fights or contention.  Mr. Adams looked at me and asked “What do we need to do to make sure that these things happen?”

Although the Adams’ goals are quite common, Mr. Adams’s seemingly simple question of what type of planning will accomplish his family’s goals requires some serious considerations.  There are two main planning options available for the Adams:  will-based planning and trust-based planning.  While most people have an idea that wills have to do with writing out what you want to happen when you die, very few people understand trusts.  In fact, a majority of people I meet associate trusts with rich people and don’t understand how a revocable living trust could be exactly what they need to accomplish their goals.  I knew that I needed to explain the benefits and shortcomings of these two estate planning options, but I suspected that the Adams, like many people for whom trust planning is a foreign concept, might have some reservations about the idea of setting up a trust.  Because of this, I decided to begin by showing the Adams how a will would function to help them to accomplish their goals, and most importantly, where a will might fall short.

I smiled at the Adams and started with a rather blunt, but true statement:  “Mr. and Mrs. Adams, the first thing you should know is that wills are for the dead and trusts are for the living.  This means that wills take effect after you are dead, but have no functional use until then.  Because of this, wills are limited to designating your wishes regarding your children and what you want to happen with your property after you die.  In saying this, I don’t mean to give the impression that wills aren’t a valuable tool for accomplishing your estate planning goals.”

“The primary reason wills are important is that after you die a will makes your wishes known to your family.  For example, people with minor children can name a guardian or caretaker for their children and even specify within the will that if they die a springing trust be created to look after their children until they are old enough.  If you pass away without a will, or ‘intestate,’ a court will select a guardian who may not be the best choice.”

“Aside from helping to care for your children after you die, wills are a good idea because a will serves as a guide to help to distribute your assets.  In a will you designate who will be given money and who will not get your money rather than letting the government decide who should get things.  In fact, you don’t even have to give money to your family, and you can designate a charity.  For people who don’t have heirs, a will can be used to prevent their property from going back to the government.”

“One of the great things my firm does when we prepare a will plan for a client is we prepare financial and health powers of attorney so that you can still have things taken care of if you are disabled.  We do this because wills only deal with things after you die, and powers of attorney help to fill in the gaps where a will might be missing a few things.  The fact is that I believe wills are so important that even when I prepare a trust based plan, I include a will to serve as a complementary auxiliary instrument in conjunction with the trust.”

“Having said all those good things about wills, I recommend that you should seriously consider a trust to take care of your circumstances.”  I paused to let this sink in and noticed that Mr. Adams had a quizzical look on his face so I went on.  “For all the advantages and benefits that wills provide, there are two big disadvantages with: taxes and probate.  While you might get tricky enough with your will planning to avoid one of these two factors, you will definitely get hit by the other one of them.  Although probate and taxes might not even be on most people’s radars, they probably should be because they can cause your family big problems.”

“For example,” I looking at Mrs. Adams, “If you and Mr. Adams absolutely insisted that you only want a will, I would draft your will to leave your money to your kids as you wish, and possibly deed your home to your kids or designate your children as beneficiaries of your 401k and insurance.  However, depending on how you want me to set things up, with a will-based plan, you will be forced to make a decision of whether you want your kids to (A) go through the trouble of probating your estate at a cost of six months and $5,000 to $10,000 or (B) be forced to pay capital gains taxes on the sale of your home, probably amounting to $20,000 or 30,000.”

“Now if you wanted to avoid probate by designating, deeding, and transferring all of your assets to your children ahead of time, you will cause some tax issues.  By putting your children on your home’s deed, they will get your basis, which is to say that if they later sell the home, they will need to pay capital gains taxes on any amount over the price you originally paid for the home.  If you instead left it to them in the will, they would need to go through the troubles and expenses of probate, but they would get a ‘step-up’ in basis.  The ‘step up’ means that if they sold the home, they would only be taxed on any increases in the home value at the time they inherited.”

“Let me get this straight,” Mr. Adams inserted, “we originally paid $150,000 for our home, so if we give it to our children in order to avoid probate, and then they go to sell it after we die, they need to pay capital gains taxes.”  “Yes,” I nodded, “15% Federal Taxes and about 7% Utah State taxes.”  Mr. Adams continued, “But if we don’t give my home to the kids before we die, then we’ll go through the probate process you are talking about.”  I nodded in response.  “I really don’t like the idea of that,” said Mr. Adams.

“You also might not like the fact that if you give put your kids on the home deed, your home won’t be protected from their mishaps,” I said.  “If they experienced divorce, bankruptcy, lawsuits, or other liabilities, your home will be on the line.”  Mrs. Smith said “We have good kids, but you never know.  I just don’t think that putting our kids on the deed is a good idea, but what if we just do the will but don’t put them on the home deed?”

 “It doesn’t get much better if you do things that way,” I said.  “If you decide to keep the kids off your home deed and save them those capital gains taxes by not giving them your property, you will be forcing them to probate your estate.  Probate is a process where a court goes through your private life after you die and decides who should get your money.  The trouble is that whether you die without a will (intestate), or with a will, the court will require you to go through probate unless your estate is valued less than $100,000 (in which case, Utah has a small estate affidavit procedure that simplifies the probate process.) But in your case, your home is worth $200,000, so your estate will need to go through probate.  This means that in a number of various court proceedings, a judge and a number of attorneys will determine how your estate should be distributed and who should take care of your children.”  Mrs. Adams looked at her husband and said quietly “I don’t like the sound of that.  Do you remember the problem that caused with your grandparents?”

“So your family had a bad time in probate,” I asked, “can you tell me about that?”  “Mr. Adams began “My grandparents passed away without a will about ten years ago, the fighting I have seen between my parents’ siblings has really torn their family apart.”  “Right,” I said, “probate is really difficult because it drags the details of your family through public courts rather than dealing with things privately like you could with a trust.  In probate, the court ultimately has total influence on what happens.” 

“Those are some pretty bad options that come with a will,” said Mr. Adams.  I nodded in agreement with Mr. Adams.  “For people who have a home or more than $100,000 in assets a trust makes more sense.  On top of the probate and tax issues, you should know that the powers of attorney I prepare in conjunction with the will might not always help you.  85% of deaths occur in nursing homes and hospitals, which tells you that a significant number of people are incapacitated at one time or other.  While Powers of attorney usually help the people that you designate to make decisions on your behalf, your ‘attorneys in fact,’ there are situations where your attorney in fact won’t be able to help you.  For example, the social security administration will not honor a durable power of attorney and neither will a large number of banks and financial institutions.  This could leave you in a bad position during incapacity or long-term care.”

“These major short-comings of wills and powers of attorney is why I recommend a revocable living trust for my clients with assets of more than $100,000.  The revocable living trust avoids probate and provides for total tax benefits.  On top of that, it avoids the problems of durable powers of attorneys and bypasses some of the potential administrative complexities that could arise from incapacity because your assets are owned by the trust.  Trusts generally provide you with some amazing options to minimize taxes, protect your assets, and even create wealth in some situations.  They are the best way to take care of your family.  The Smiths looked at each other and then back at me “It looks like we’ll want you to prepare a living trust.”

“You definitely should,” I said.  “For one thing, my firm charges a very reasonable fee to set up your basic living trust.  On top of that, I think it is the best way to accomplish your goals of providing for your dependent children, taking care of each yourselves come what may, and protecting whatever money is left over for your children.  A revocable living trust will accomplish all of these things.”

The Adams, like many of my clients, found that a revocable living trust was a great fit for meeting their needs and goals.  The revocable living trust not only serves my clients during life, but also ensures that they provide for their family after death.  I recommend this powerful planning strategy to anyone who (1) have more than $100,000 in assets that might be probated, (2) have appreciated homes or other property subject to capital gains taxes, and (3) people who want to protect themselves and their family from the burdens of future disability.  In my next article on “Estate Planning Power Plays,” I will discuss ways to maximizing your wealth through insurance and estate planning.

Rustin Diehl
Attorney and Counselor at Law
Allegis Law, PLLC
(801) 938-4035

Disclaimer:  My intent in writing this article is to describe estate planning, and this information should not be construed as providing legal advice.  Your individual circumstances may not fit what I have written, and you should seek personal advice and counsel from an attorney or tax professional.