Life is full of choices, right? The same is true when it comes to estate planning. The two most popular options traditionally chosen are a Last Will & Testament (will) or a Revocable Living Trust (trust). There are many factors that must be taken into consideration when deciding which option is the best for you and your family.
One of the main factors in formulating an estate plan is the size of your estate. If the estate value is over the state’s statutory limit, a probate proceeding may occur after you pass away. An estate consists of your real property, personal possessions, cash, brokerage accounts, retirement and life insurance. Each state has its own threshold that triggers a probate. In Arizona, if you meet one of the following two triggers, a probate can occur: (1) if your property’s equity is over $100,000; or (2) if your personal possessions, cash, brokerage accounts, retirement and life insurance are over $75,000.
Another important factor is determining what is important to you as it relates to your beneficiaries. What if your kids aren’t in the best of marriages? Do you want the inheritance you leave your beneficiaries to have asset protection against creditors or divorce? Long-term care expenses are on the rise – would you like to prevent the government from making your beneficiaries spend down the inheritance you leave them? These are just some of the factors that must be considered when formulating the best estate plan.
There are many differences between wills and trusts. For example, unlike a trust, an estate plan consisting of a will can entail possibly two probates – a living probate and a death probate. The living probate is often forgotten when one is considering estate planning. The will is considered a death instrument, that is, it springs up only when you die. However, if you become incapacitated, the will does not handle that situation. All too often, a living probate would have to occur to legally put someone in place to make your financial and healthcare decisions. This court process is called a guardianship and conservatorship. The death probate occurs when you pass away with assets in your name exceeding the probate threshold. A court proceeding would have to occur to legally transfer your assets after you pass away.
Can a living probate be avoided? Yes, a living probate (guardianship) can be avoided if you have properly drafted healthcare documents. Every individual over 18 years of age needs the following documents:
Healthcare Power of Attorney
Mental Healthcare Power of Attorney
Living Will
Authorization to Disclose Information (HIPAA)
Can a death probate be avoided? Yes, and if your estate exceeds the probate threshold an option to consider is a trust. A trust allows for your assets to be titled (funded) in the name of your trust, allowing your estate to bypass a probate proceeding. With a properly funded trust, there are no assets titled in your name when you pass away. It is important to continue to title your assets to the trust after the creation of the trust.
Another difference between a will and a trust is there is no asset protection afforded to your beneficiaries with a will. A beneficiary under a will receives an outright distribution. For example, if Sally receives $50,000 under her mother’s will, Sally must take her inheritance and combine it with her own personal funds. Unfortunately, this distribution is subject to all of Sally’s potential creditors. If Sally is in the middle of a divorce or a lawsuit ensues, this distribution can be subject to creditors. However, with a properly drafted trust, Sally’s distribution would be protected from divorce, creditors and Medicaid spend-down.
To determine which estate planning option should be chosen for you and your family, it’s important to see an experienced estate-planning attorney to discuss the many factors that must go into this decision, because estate planning is definitely not a one size fits all plan.
Wendy W. Harn is a native of Tucson. Wendy understands the value of family and how important it is to protect them through estate planning. She is married to her college sweetheart and is the mother of four children. She understands that estate planning is about protecting the ones you love. Upon graduating from Tucson’s Santa Rita High School, Wendy went on to receive majors in both finance and real estate from the University of Arizona. She received her Juris Doctor from the University of Oklahoma in May of 1995.
