Planning for the Modest Estate

Jean and Paul Dugan have come to meet with me to discuss their estate planning needs. They are in their late 60’s, with an estate of $475,000 and several adult children. They know that they are not in the estate tax range, and are somewhat confused as to what their estate planning options may be.

Although estate tax planning is often the motivation for estate planning, an individual with a more modest estate can also benefit from a good estate plan. While tax planning issues may not be a concern, many other concerns are the same: how do I maintain the best quality of life for myself that I can during my lifetime, while protecting my family after I am gone?

Powers of attorney are an important part of the estate plan, because they can set the stage for the quality of care you will receive if you become incompetent or incapacitated. Do you want to remain in your home rather than going to a nursing home? Do you want a certain person or people making medical decisions for you? Do you want to choose someone to care for your financial affairs for you? These are the tasks carried out by powers of attorney- a delegation of certain responsibilities to persons you choose.

Being able to pass whatever you have accumulated in your life to your heirs is an important component of a good estate plan. Being able to decide who inherits what, and when they inherit it, can be done with a will or a trust. Specialized continuing trusts, such as a special needs trust or a testamentary minors trust, can be written into a will or a trust.

A will is a document in which you specify which heirs receive what assets, and when they receive them. Do you have a car that you would like to pass to your 22 year old granddaughter? Do you want to pass your late spouse’s coin collection to one particular child or grandchild? Do you want to make a cash gift to a family member or to your church or alma mater? These actions can all be accomplished with a will, although it is important to remember that probate is required whenever a will passes your assets.

If you want to avoid probate, a trust may be the estate planning option for you. The living trust allows you to re-title your assets so that you own them as trustee of your trust during your lifetime, and direct the passage of those assets at your death. In the trust document, you specify your successor trustees, who take over management of the trust when you are no longer able. A transition from trustee to successor trustee does not require probate, which can make settling an estate using a living trust a much simpler and less expensive process than when using a will.

Because the Dugans own two homes and a number of other investments, they may have a probate problem at the death of the survivor of the two of them. They probably should decide carefully between a will and a trust.

How do we decide whether someone needs a trust, or whether a will is enough? There are several considerations. First, we look at the financial consideration of the cost of a trust versus the cost of probating an estate with a will. My general rule of thumb is to look at all of the assets you have that would need to be probated. These are assets that are owned solely in your name, with no beneficiaries, no transfer on death designations, and no co-owners who have rights of survivorship. Total the value of your probate assets and multiply the total by .025. This figure will be an approximation of how much it will cost to probate your estate in Virginia. If this approximation of your probate cost is less than the cost of a trust, you do not really need a trust. If the approximate probate cost is greater than a trust, you can benefit from a living trust. In the case of the Dugans, their probate estate totals approximately $370,000 (the remainder of their estate is in assets with a beneficiary designation, so they will not have to be probated). Three and one-half percent of $370,000 is $9250, which is an estimate of the Dugan’s probate costs (these costs may be higher if the Dugans’ children use an attorney to help probate the estate). In this case, the estimate of the probate costs is far greater than the cost of a living trust.

The next issue to be considered in deciding between a will and a trust is the difficulty in completing probate for those who will be settling your estate. If the persons who will be settling your estate live locally and can manage the probate process, a will may be a viable option for you. If, however, your potential executors live in other states or do not have a lot of time to devote to probate, it may be kinder to them to use a trust. This is especially true if you own real property in another state. Real property is probated where it is located, so the beach house that the Dugans own in North Carolina will necessitate a second probate process in North Carolina if it is not owned by a trust. Ease of settling their estate is a concern for the Dugans, as their children live in other states.

The last issue to be considered in deciding between a will and a trust is whether privacy is a big concern for you. When an estate is settled with a will, many of the financial records of the decedent become a matter of public record, as the will and related records are recorded in the same manner that a deed is recorded. If this is not a concern to you, a will is still a viable option. If you are concerned about the privacy issue, possibly because you are concerned about a challenge to your will, maybe a trust would be the better alternative.

Whatever your needs and concerns are, using a trust or a will to plan for the modest estate is a good start. Valid powers of attorney appointing someone to care for us is a safeguard no one should be without. Take care of your modest estate, including an estate plan- it will benefit you and your family in the long run.