Roshani Pandey is a financial advisor and founder of True Root Financial. True Root Financial is located in San Francisco, CA and serves clients across the globe.
Mr. No-Will died suddenly and without a will. He was the chief financial officer of the family. Mrs. No-Will is an Economics professor at UC Berkeley, but does not know anything about wills and trusts.
As she picks up the pieces after her husband’s death, she learns that since he did not have a will, the assets he left behind (also known as his estate), would be governed by the intestate succession laws of his state, California in this case. The state would decide who gets what. Additionally, his estate would have to go through something called a probate court, which could take weeks or months and be costly.
Mrs. No-will was worried. What was going to happen to her? Would she lose her assets? Or, would it now be tied up in the court for months? Had they made a big mistake by not having a will?
If the assets are titled as intended, you might potentially not need a will:
After calling all the institutions where Mr. No-Will held their assets, she learned the following:
- The house they lived in was titled or owned as community property with rights of survivorship. That meant it passed directly to Mrs. No-Will upon Mr. No-will’s death. Note: community property title is available only in a few states. In others, joint tenants with rights of survivorship may be used to pass assets to the surviving spouse. Check your state laws to be sure
- Their investment accounts were also titled as community property with rights of survivorship. So, the assets passed to her directly, even without a will
- She was the named beneficiary of his life insurance. So, the insurance payout passed outright to her
- She was also the named beneficiary of his 401K and IRA accounts. So, these accounts also passed outright to her
- Their two cars were registered to be transferred upon death to Mrs. No-Will
Mrs. No-will breathed a sigh of relief. Although the pain of losing her husband was great, she felt grateful for his ever present thoughtfulness. She learned that the way assets are titled could have a big impact on how they are transferred upon death and can completely bypass a will and avoid probate court.
Mrs. No-will wondered if a will was necessary at all. After further research, she learned the following:
A will gives you more control over how the assets are transferred
A will does, in fact give you control over how and to whom you want the assets transferred.
For example, Mrs. No-will has two daughters – Ava and Bella. Ava is 30 and and has her own business. Bella, 18, is in college but wants to drop out. On her will, Mrs. No-Will decides to include the following provisions:
- On her passing, the assets go 50/50 to her daughters
- Ava, the 30 year-old gets her inheritance outright
- Bella, the 18- year old gets her inheritance if she is still in college or has graduated
Mrs. No-will will review the will periodically to see if she wants to change anything.
A will allows you to appoint an executor and a guardian for your children
- Mrs. No-Will appoints her sister as the executor of her will. An executor is responsible for carrying out the instructions of the will like paying the creditors and passing the assets to the heirs. In the absence of a named executor, the court appoints one
- If Mrs. No-Will had a minor child, she would have appointed her sister as their guardian
What other documents do you need besides a will?
- Advance directive for healthcare – This is a a set of legal documents that state your wishes for healthcare in the event that you’re unable to communicate it yourself. Usually, this is when you are medically determined to be permanently unconscious or terminally ill by at least two physicians
- The advance directive for healthcare consists of two documents: a living will, where you state your healthcare wishes and a durable healthcare power of attorney, where you appoint an agent, usually a spouse or a close relative, to carry out your healthcare wishes
- Durable financial power of attorney – This legal document allows you to appoint someone you trust to take over your finances in case you are incapacitated
During her research, Mrs. No-Will learns about another legal document called a living trust that can do everything a will does and more.
What is a trust?
A trust is basically a set of instructions. Let’s say Mrs. No-will creates a trust and puts all her assets in it. The assets will be for her to spend during her lifetime but once she passes away, it will go to her children. She also appoints herself to carry out these instructions as long as she’s alive. Once she passes away or is incapacitated, her sister will carry the instructions based on what the trust agreement says.
This is an example of a living trust. Mrs. No-Will is the grantor of the trust because she put her assets into the trusts. She’s also the current beneficiary and trustee. Her children are the successor beneficiaries and her sister is the successor trustee.
Why use a living trust?
- Avoid probate – If someone dies with a will, the will still has to go to probate court, where the court validates the will and starts a procedure to pay off the creditors and pass the assets to the rightful owners. However, if you have a living trust, you completely bypass the probate court. Your successor trustee will pay off the creditors and pass your assets as per the instructions on the trust documents. For many with large and complicated estate, such as those with a family business, this is a big advantage. If a large or complicated estate has to go through probate, it can cost a lot of time and money
- Privacy – While the contents of a will are public record, the contents of a living trust are not
- Successor trustee help – In the event that you’re incapacitated, your successor trustee can step in and manage your finances. You can still also get a durable financial power of attorney to oversee assets that are outside the trust. Additionally, you will also need the advance directive of healthcare discussed above to carry out your healthcare wishes
- Might be more advantageous than a will – Typically, a living trust can be more difficult to contest than a will. It can also be a useful piece for tax planning if you have a large estate
Why not to use a living trust?
- Expensive to set up – A living trust is generally more complicated and costs more money to set up than a will does
- Need more effort – In order for any trust to exist, it has to be funded. Simply drafting the documents is not enough. This means that once you create a living trust, you have to re-title all your assets to name the trust as its owner. This might take a lot of time and effort. Additionally, you will also need to create a pour-over will to address any assets that the trust did not include
Conclusion: Do you need a will or a trust?
It depends on how large and complicated your estate is and how you want to manage its transfer.
- If you have straightforward assets that you want transferred outright to someone at your death, simply re-titling the assets might be enough
- If you want more control over who gets what, a will might be right for you
- If you have significant and/or complicated assets, a living trust might be right for you
- Always check with an attorney licensed to practice in your state, to determine what is right for you. State laws can vary greatly. To keep the attorney costs low, you could start by consulting with an online attorney website such as LegalZoom
What did Mrs. No-Will do?
As for Mrs. No-Will, she went from having no will to having one and also setting up an advance directive for healthcare and a durable financial power of attorney.
Important disclosure: Please note that this article is for information purposes only and does not constitute tax, legal or financial advice. Please consult with a CPA for tax advice, an attorney licensed to practice in your state for legal advice and a licensed financial advisor for financial advice.