Revocable Living Trust vs. Last Will and Testament - Assignment Example

?Revocable Living Trust vs. Last Will and Testament It is imperative for most people to have some form of e planning or e administration inplace because it provides security for them and their families. It is one of the important decisions that transfer wealth and assets to others such as family members, relatives, friends and charities. The idea is to establish a mechanism or a system in such a way that a person’s estate or assets are maintained and protected. The manner by which estate planning and administration options are designed also provides the disposition of assets within and after the owner’s life according to his requirements and his wishes. This results to the preservation of a harmonious familial relationship and the achievement of several financial benefits such as the creation of cash reserves and the after-tax income available. According to Brown and Myers (2008), it is important to underscore that the primary objective of all family estate planning is to provide psychological and financial security by obtaining “the maximum benefits of principal and income for the family and to pass on the family property intact (i.e. without losses)” (23). The last will and testament is an excellent example of estate planning and administration. There is also the case the revocable living trust. Both of these are popular choices for people seeking to manage and administer their assets and properties. This paper will explore why the revocable living trust can prove to be more beneficial for everyone than the last will and testament. Background The last will and testament or more generally known as the will is a legal document that provides the disposition of assets and properties. Simply put, in case of death, the ownership of a property is transferred according to the terms of the will of the deceased, the terms that document his desires particularly in the distribution of his estate and assets (Wardle and Nolan, 1042). Gau (2004) provided another definition, which states that it is “an expression of a person’s wishes for the disposition of property and the protection of loved ones at the time of the maker’s death” (7). The US legal framework considers the use of will as a developmental offshoot of basic estate planning, that one with the simple goal of planning for death (Wardle and Nolan, 1039-1043). It was further provided that the impetus for the development of wills was the need for federal estate tax planning for death and lifetime transfers (1039-1040). Baker wrote that the key is to keep it up to date because a clearly defined will could be the best piece of legal work that one could have that can be used to honor one’s wishes and in defining the family’s futures (52). She also stressed that the will is a reliable backup to a trust in the estate planning process, in addition to several conditions, which she has listed such as: The fact that there are properties that are better left in a will; Money such as lottery winning can be distributed after death through a will and as a component of an estate plan; Parents with minor children. The will can name the guardian and the administrator of assets and properties before the children reach legal age; The appointment of an executor; and Disinheriting a person (Baker, 53-54). There are many other instances where the will is indispensable. It is important for people interested to draft their own wills to consult an estate planning professional or an estate planning team. The process may be simple, but there is a requirement to be thorough, clear and detailed so that the documented would not be invalidated, contested and misinterpreted. It is also important to highlight that if assets are to be transferred through a will, the maker is necessarily deceased. The utility of the will as explained in this section does not mean that there are no other alternatives. There are several others that people prefer because it is more beneficial or that it is aligned with their own estate planning objectives. The Revocable Living Trust The revocable living trust, (also known as the revocable inter vivos trust as recognized in cases like Belshe v Hope) is defined as the “trust established during the settlor’s life that may be revoked by settlor,” and that it “typically provides that the trust property is to be used for the settlor’s benefit during the settlor’s life, and, upon the settlor’s death, the trust assets are to be distributed to the settlor’s chosen beneficiaries” (Tenney, Hall and Mingolla 2008, 4-10). According to Shenkman, the owner of the trust retains complete control over the assets in the trust while the trustor is alive and competent (148). The concepts that underpin this legal estate planning option include trust, living trust, trustor/settler and trustees. Trust refers to the legal contract between a trustor, the maker of the trust and the trustees, the people who manages the trust assets for the intended beneficiaries. Living trust, on the other hand, means that the trust can be changed by the trustor anytime in his lifetime except in instances when he or she could no longer display contractual capacity. Elias, Renauer and Leonard described the process in the following words: The property owner creates a trust document naming him or herself as the trustee, another person as successor trustee to take over when the owner dies, and typically one or more beneficiaries to receive the property upon the owner’s death. When the original property owner dies, the successor trustee steps in and distributes the property… All of this happens without going through court (82). The revocable living trust is emerging as a popular legal estate planning tool. This can be attributed to several advantages especially when compared with other planning options such as the last will and testament. Why the Revocable Living Trust is Better than the Last Will and Testament According to experts, the revocable living trust can be considered as the centerpiece for many effective estate plans (Kirby 2004, 132). Its features are preferable for many particularly when compared with last will and testament because of its flexibility and coverage. For a comparison between revocable living trust and will, see Table 1. Will Revocable Living Trust Can keep inheritance from the heirs until they reach age thirty or older No Yes Can arrange to have funds managed for the benefit of an heir who is handicapped or otherwise unable to handle funds No Yes Can ensure that grandchildren will receive the estate after the children die, excluding spouses of the children No Yes Can leave the assets to children from an earlier marriage, cutting out the present spouse No Depends on the state Can retain control of assets when alive Yes Yes The plan provide a mechanism of handling finances when disabled/incapacitated No Yes Table 1: The Will vs. Revocable Living Trust (Source: Brown and Myers, 24) It is clear based from the outline of features above that the revocable living trust is more comprehensive and effective in addressing the issues involved in estate planning. Some of the notable advantages over the last will and testament will be discussed. The revocable living trust is not probated. This is point is significant. In most states, the property owned by the deceased at the time of death has to go through the court probate process (Leming and Dickinson 2010, 451). This is true in the case of the will. It has to be probated in order to prove or establish that the document being offered for recognition is genuine (Brown and Myers, 315). Probate is “the legal process where a court oversees the payment of debts and distribution of property under a will” (Leming and Dickinson, 451). Although the process seeks to protect the deceased by ensuring that his will are carried out, it can prove to be too complex, time, consuming expensive and unnecessary. This can be demonstrated in the requirement for probate hearing, which is a procedure with all the formalities of a trial (Helewitz 2008, 216). The revocable living trust is different in such a way that upon the trustor’s death, the terms of the trust is immediately distributed avoiding the lengthy probate process. The elimination of the probate process in the revocable living trust method also means that the entire process of estate transfer and distribution remain private. Furthermore, it will be difficult for disgruntled beneficiaries to launch unwarranted and frivolous contests or legal actions against the trustor’s desires since trust distributions as well as the identity of trust beneficiaries remain private (Moy 2004, 102). The will, once filed, effectively becomes part of the public record, hence, accessible to everyone (Leming and Dickinson, 451). In terms of tax, revocable living trust does not have tax impacts. It will use a trustor’s Social Security number but it will not require the filing of a separate tax return and, in addition, there is no tax consequence once one transfers assets into the trust (Savage, 331). The will or the transfer of estate and assets through this method can incur federal estate taxes and inheritance taxes, as well as costs from debts and bills, which would have to be paid since the distribution will be overseen by the probate court (Clifford, 104). Revocable living trust also provides the mechanisms to administer property during incapacity. Once incapacitated due to illness, accident or other circumstances, the family or the relatives need not resort to filing a case in court for permission and supervision to make decisions about the property because the successor trustee immediately steps in to follow the trustor’s instructions. This is different in the case of a will. A probate court is needed to implement it especially when problems arise (Carper and McKinsey 2011, 650). There is a requirement for a long legal process involving the court to resolve contest issues. The will can entail several other legal obstacles. For example, if a person owns property located in more than one state, the heirs will have to undergo complex legal procedures and probate proceedings. Say, the properties include a real estate in California and a home in Texas. Each of the property involved and its distribution are subject to separate laws enforced in the two states. Probates would have to be opened in both states. This dilemma is eliminated in revocable living trust. Covell and Covell (2005) explained: Title to all real estate, regardless of location, is transferred to the trust while you are alive. The trust, through you as a trustee or through s successor trustee, can sell the property or distribute the property to your heirs at any time. Since you do not own the property at the time of your death, there is no necessity for any succession or probate (p.126). Revocable living trust is also beneficial in cases of bankruptcy. Say, when the owner of a house creates a trust, naming this property in it, that person owns the house and he will also be considered the trustee. If the owner suddenly found himself filing for bankruptcy, he can effectively claim a homestead exemption for the property as trustee. The reason for this, wrote Elias, Renauer and Leonard, is that when a revocable living trust is created, the maker retains actual ownership of the property even when it is recognized as a trust instead of outright ownership that is why it is legitimate and valid to claim a homestead exemption in most states (p.82). A related advantage is the manner by which an individual can transfer his assets to his spouse’s trust. By doing so, it will be safe from being obtained by a creditor, for example. There are very few limitations to a revocable living trust. First is the incapacity to afford legal assistance. If an individual cannot secure the services of an attorney, particularly an expert in estate planning, the process may be futile. Secondly, there is the case when there are few estates, property or wealth to be transferred. Finally, if one is wealthy but assets are primarily secured in retirement accounts and life insurance policies, there would be few assets to transfer to the trust (Shenkman, 150). Conclusion Unarguably, revocable living trust has several advantages over the last will and testament. Essentially, it is more flexible and could address more issues in estate planning and administration. A trustor can modify and change his living trust anytime within his lifetime. It also avoids the probate process, which effectively eliminates numerous challenges involved in the last will and testament. The revocable living trust makes the process shorter; it prevents legal challenges; it provides the tools and mechanisms for the security and convenience of the trustor especially in the event of incapacity. There are many benefits that many people find convenient and helpful. The last will and testament is fundamentally effective: it gets the job done, so to speak. Once a person drafts a will, his instructions and his desires will be carried out upon his death. The principle is seemingly straightforward. But the rigidity of this method as well as the length and cost of the process could be too much especially for the beneficiaries. Somehow, this particular aspect in the will undermines the ultimate objective of effective estate planning, which is the psychological and financial security of the parties involved. This is highlighted in instances of protracted legal challenges and contest, which could ruin the decedent’s family. The will, however, is still mandatory in many cases even when there is already the existence of a trust. All in all, the choice between revocable living trust and the last will and testament is both personal and individual. People have different circumstances, requirements and preferences: a will may work for some while a revocable will might work for others. Work Cited Baker, Sandy. The Complete Guide to Planning Your Estate: A Step-by-step Plan to Protect Your Assets, Limit Your Assets, Limit Your Taxes, and Ensure Your Wishes Are Fulfilled. Ocala, FLA: Atlantic Publishing Company, 2007. Print. Belshe v Hope. 38 Cal. Rptr. 2D 917. 1995. Brown, Gordon and Scott Myers. Administration of wills, trusts, and estates. New York: Cengage Learning, 2008. Print. Carper, Donald and John McKinsey. Understanding the Law. New York: Cengage Learning, 2011. Print. Clifford, Denis. Nolo's Simple Will Book. Berkeley, CA: Nolo, 2007. Print. Covell, Stephen and Lauren Covell. Louisiana Legal Advisor. Baton Rouge, LA: Charleston Press, 2005. Print. Elias, Stephen, Albin Renauer, and Robin Leonard. How to File for Chapter 7 Bankruptcy. Berkeley, CA: Nolo, 2009. Print. Gau, Michael. A Pratical Guide to Estate Planning and Administration. New York: Cengage Learning, 2004. Print. Helewitz, Jeffrey. Basic Wills, Trusts, and Estates for Paralegals, Fourth Edition. New York: Aspen Publishers, 2008. Print. Kirby, Linda. The Executor's Guide: How to Administer an Estate Under a Will. Westport, CT: Greenwood Publishing Group, 2004. Print. Leming, Michael and George Dickinson. Understanding Dying, Death, & Bereavement. New York: Cengage Learning, 2010. Print. Moy, Doug. Living Trusts. Hoboken, NJ: John Wiley and Sons, 2004. Print. Savage, Terry. The Savage Truth on Money. Hoboken, NJ: John Wiley and Sons, 2011. Print. Shenkman, Martin. Estate and Financial Planning for People Living with COPD. New York: Demos Medical Publishing, 2012. Print. Tenney, Cornelia, Martin Hall, and Lisa Mingolla. Practical Guide to Estate Planning 2009. Chicago, IL: CCH, 2008. Print. Wardle, Dennis and Laurence Nolan. Family law in the USA. Netherlands: Kluwer Law International, 2011. Print. Read More