The Millionaire Hermit

Stumbled across an interesting article on probate and wills.  Looks like it was originally published last year.  Worth a read:  The Mystery of the Millionaire Hermit, in Bloomberg.

It’s a good reminder to take the time now to prepare a will, or to make other estate planning arrangements.  Even if it is just to confirm that you want your estate to pass to your family, it can save a lot of trouble and headache for everyone involved.

Wills and Trusts and Such

Estate Planning (or, what happens to my stuff when I’m dead?)

You can’t take it with you, so what’s going to happen to it?

If you don’t prepare a will, trust, or other document to govern your property when you die, it will be distributed according to the “laws of intestate succession.”  It can be a little complicated, but the gist of it is that if you were married, everything goes to your spouse.  If you weren’t married (or if your spouse died before you) it will be divided evenly between your surviving children.  There are some more complicated provisions, dealing with what happens if you don’t have kids (it goes to your parents), or if one of your children died before you (their share goes to their kids).  But by far the most common situation is that it passes to the children in equal shares.

This may not seem like such a bad thing.  It’s a pretty fair way to divide your assets, and certainly has the advantage of being easy for you and simple to understand.  However, even if the final result is the what you would want (even distribution to your kids), the process for “intestate succession” is more complicated and expensive than probating a will or administering a trust.  So lets take a look at what you can do to make things easier on your loved ones.

First is prepare a simple will, signed and witnessed in accordance with state law.  This is usually fairly inexpensive, and for most people will give them all the control they want or need over their estate when they pass.  The will must name a personal representative (sometimes called an executor), who will take charge of administering the estate, dividing the assets according to the instructions of the will.  You can also make specific directions in the will, altering the amount that each beneficiary takes, or directing that certain items be given to certain people (things with sentimental value, for instance).  You may also direct that non-relatives (including charities) receive some or all of your assets under the will.

A will does have to be probated in order to be valid.  This basically means presenting it to a court and and receiving authorization to proceed under its terms.  It’s really not a difficult process (unless someone wishes to contest the will, arguing that it is not valid), but is does have to be done.

The second option is to create a trust.  A “trust” is an independent legal entity (a bit like a corporation), managed by someone called a “trustee,” who is supposed to manage the trust for the benefit of people named as “beneficiaries” of the trust.  The assets are legally owned by the trustee, but only on behalf of the trust.  A trust has two advantages over a will.  First, it avoids probate and some of the messes that might come with it (like contested wills).  Second, it provides much more flexibility in how the assets are used.

A trust avoids probate because all the assets are held by the trust, not by any person.  An example may help.  Carla forms the Carla Family Trust to manage her assets when she dies.  She names herself as trustee, transfers all her assets to the trust, and names her son, Bob, as successor trustee when she dies or is incapacitated.  As long as she is alive, she manages the assets of the trust as if she still owned them, buying and selling property, making and spending money, just like normal.  When she dies, rather than going through probate, Bob simply steps in as trustee and distributes the assets according the the instructions in the trust.

A trust is more flexible than a will because it continues to exist after the creator of the trust dies.  This allows the trust to do more than merely distribute assets, the way a will would.  Using the same example from above, imagine that Carla wants to use her assets to by a cabin for her descendants to use when she is gone.  Instead of the trust instructing Bob to distribute the assets, she simply changes the instructions to tell Bob to buy a cabin and let her descendants use it.  In this way, a trust can be used to establish an education scholarship fund, to promote a charity, to feed the hungry, or just about anything else.  Trust have been established for scientific research, to promote the arts, and even to take care of family pets (it’s true!).  The downside to a trust is that it is a little more expensive to set up and can be more complicated to administer.  You also have to make sure to transfer ownership of all your assets into the trust, otherwise you’ll need to do probate for those assets that were not included.

A final instrument for estate planning (usually used alongside a trust or a will, and not as a replacement) is the POD (payable on death) account.  This refers to things like life-insurance, savings accounts, and sometimes real estate properties that have a named beneficiary or joint owner.  These types of things pass outside of a will, a trust, or probate based on a contract with the provider.  So if you name all your children as the beneficiaries on your life insurance policy, as soon as they present the death certificate to the insurance company, they company will write a check to the people named as beneficiaries.  This will happen no matter what instructions are contained in a will or trust.   Just make sure to keep your beneficiaries up to date (adding children as they are born, removing a spouse after death or divorce).