3. The Paths Your Client Can Take From Here Flashcards
The choice and consequence of dying intestate
-client has no control
-strangers are likely to be in control
-the costs are extreme
-the delay could be extreme
-the process is public
-widower could receive as little as 1/3 based on state statutory formula
-minor children/grandchildren could inherit
The choice and consequence of gifting while alive
Pro: there may be no probate, and fees, costs and commissions could be saved.
Cons:
-client loses all control
-probate may still result if the gifts are not perfected
-three year look back rule
-state and federal taxes may be incurred
-the donee takes the property at the donor’s tax basis
-something may go amiss with the donee (i.e., divorce or bankruptcy)
-client cannot use the property as collateral for a loan or refinance
The choice and consequence of holding assets in joint ownership
-joint owners must agree on any sale, refinance, or disposition
-passes by operation of law at first death, but there will be probate on death of surviving owner
-property receives only half step up
-subject to debts and liabilities of any joint owner, so no creditor protection
-can defeat any attempt to do disability (Medicaid) planning for non-institutionalized spouse
The choice and consequence of holding assets in POD or TOD accounts
-avoids probate
-a Will is still necessary to take care of the disposition of real estate and personal property, to name a personal guardian for minor children, to disinherit a child, and to name an executor
-the state, Medicaid, and creditors can all place liens on POD and TOD accounts to prevent disbursements into liens are satisfied
The choice and consequence of drafting a Will
-there will be probate, which is expensive, time-consuming, public, and agonizing
-how much time, effort, and expense do they want to postpone for their heirs following their incapacity or death?
-a necessary part of any estate plan, even with a RLT, as a fall back document
The choice and consequence of drafting a Revocable Living Trust
-assures client will have total control of their affairs and that those they know and trust will be in charge of their estate should they become incompetent or die
-upfront costs and more complexity, but the savings realized following death are usually substantial
Will vs RLT: Cost
RLT has more upfront costs, but the real cost of probate at death is 6-8% of gross estate.
Will vs RLT: Privacy
Will is a matter of public record once submitted, as is complete inventory of the estate (to disgruntled heirs looking to contest or potential buyers of illiquid assets who may not offer top dollar since they know exactly how much cash the estate needs to raise).
Some states require a Certificate or Affidavit of Trust to be filed by on death of a trustor, but that cannot be used by a disgruntled heir to discover the Trust’s assets or challenge its validity.
Will vs RLT: Time
It is almost impossible to close even the simplest probate estate in less than one year, but the vast majority of Trust-centered estates can be closed in a matter of weeks.
Will vs RLT: Potential litigation
Will-centered estate planning encourages litigation, and Living Trust-centered planning gives more assurance efforts will be free of litigation.
Period for contesting a Will is limited to a year or less, but contesting a Trust could extend up to several years.
Will vs RLT: Ancillary administration
Living Trust-centered estate planning never requires the expense and delay of ancillary administration that will always occur within the estate of a decedent who dies with a Will and owning out of state real property.
Will vs RLT: Disability planning
RLTs allow successor trustees who will be subject to the terms of the trust, which is far more effective than Will-centered estate plans which rely on guardianship proceedings and powers of attorney.
Will vs RLT: Protection from creditors
Even if property doesn’t pass through probate (i.e., IRA, joint tenancy, TOD/POD, and Trusts), it is still subject to creditor claims. So, RLT-centered plans are at least as effective as the Will-centered plans.
Will vs RLT: Medicaid spenddown
There is no guarantee that any strategy will guard against Medicaid spenddown. No advantage for RLT vs Will.
If no LTC insurance, gifting everything to an Irrevocable Trust managed by children could be an option, BUT there is a five year look back rule, total reliance on children, and loss of control.
Will vs RLT: Continuity of business affairs
RLT is much more effective, as it can altogether prevent the expense, delay, public disclosure of business operations, and lack of management continuity that probate may create. (With Will, management shifts to executor then to appropriate heir.)
