Wills and trusts are among the many estate planning vehicles that provide a method for disposing of assets and carrying out your wishes upon death. Oftentimes, the difficult choice is deciding which one of the two, or both, is the most appropriate in order to properly dispose of assets in light of a family’s unique needs and circumstances.

What is a Will?

A will is a signed document that conforms to state law to provide for the distribution of the assets of a decedent upon his or her death. The distribution of assets is carried out by an executor–the person appointed in a will to manage and distribute the decedent’s estate. The process of distributing assets that pass under a will is overseen by the probate court in the county in which the decedent resided. The “probate” process involves varying degrees of cost and difficulty depending on the circumstances. In addition to providing for the distribution of assets, a will can also designate guardians of minor or incapacitated children of the decedent.

What is a Trust?

A trust is also a mechanism for managing the distribution of assets upon your death. However, unlike a will, a trust affords the ability to manage assets during your lifetime, as well as upon death. Trusts come in many different forms and they are employed to accomplish various needs, including maintaining the privacy of your estate, managing assets efficiently, maximizing the use of estate and gift tax exemptions, avoiding probate, and protecting your estate from creditors and unanticipated changes in family circumstances, like divorce.

When a living trust is employed, it is necessary to transfer substantially all of your assets into the trust during your lifetime. This, in turn, allows family members to avoid the cost and hassle of probate. The management and distribution of trust assets is carried out by a trustee, the person who holds legal title to the trust’s assets for the benefit of the trust’s beneficiaries. The initial trustee is often the original settlor, the person who created the trust, followed by a successor trustee upon the settlor’s death or incapacity. Any assets that are not transferred into a trust during the lifetime of the settlor can pass into the trust upon the settlor’s death through a “pour over” provision in the settlor’s will.

What is Right For You?

Every family’s needs and circumstances are unique, thus there is no one-size-fits-all estate plan. The costs and benefits of both a will and a trust should be carefully weighed in order to ensure that the assets you have worked so hard to amass are appropriately protected, that your family is provided for to the fullest extent possible, and that your wishes are properly carried out upon your death. If you have any questions about estate planning or would like help determining whether a will or trust is right for you, we would encourage you to call or schedule an appointment to visit with us.

If you’ve ever stretched something flexible, like a rubber band, beyond its intended maximum stretching point, you know what happens; it breaks if stretched so far that it becomes misshapen. Often the snap of the breaking rubber band can surprise us and hurt. Many estate planning techniques are like that. Flexibility is good; it serves a purpose. But when events change too dramatically, that flexibility can yield unintended results. So we encourage frequent revisiting of the plan to make sure the flexible tools we incorporate into a plan don’t get stretched beyond what was intended.

In the traditional estate plan, a formula clause is employed to calculate an amount that will pass into a “credit shelter trust.” What goes into the credit shelter trust is property equal to the amount that can pass estate tax free at the first spouse’s passing. The credit shelter trust can be for the benefit of a surviving spouse, with the assets of the trust avoiding estate tax on the death of that spouse. However, sometimes clients with children by prior marriages determine that this “tax- free” amount should pass directly to children, or to trusts for their benefit, when the first spouse passes. When the estate tax exemption amount ranged from $600,000 to $2,000,000 or even $3,500,000, this method of determining the gift to children may have achieved the result desired. Yet when the exemption amount was raised to $5,000,000 this year, would that be best?

Also the expected return on investments for the surviving spouse might have been higher years ago than it is now. What effect would that have on the outcome from the funding formula in the will or trust?

Consider the case of a husband and wife who both have children from previous marriages. Their community property assets are $5,000,000 with an additional $4,000,000 in life insurance–$2,000,000 on each person. To avoid the children from the first spouse having to wait until their step-parent passes away to receive any inheritance, each of the spouses left their respective “estate tax free amount” to their own children, with the excess going to the surviving spouse. If the plan was executed in 2007, when the exemption was $2,000,000, the result would be the children receiving $2,000,000 and the remainder passing to the surviving spouse. Consequently, the surviving spouse ends up with $7,000,000 in assets and the children with $2,000,000. However, in 2011, when the estate tax exemption is $5,000,000, the formula causes this “tax free” amount to go to the children, with the surviving spouse receiving $4,000,000.

In addition, current investment returns on the assets left to the surviving spouse are the lowest they have been in decades. The spouse may have received the house or other non-income producing assets as a part of his or her inheritance. As a result, not only is the surviving spouse receiving less of an overall inheritance, but his or her ability to earn income with the inherited assets is impaired as well.

The question is whether this is an unintended consequence from a flexible formula clause that is stretched so far that it is now broken. Call us if we need to help determine if your documents accomplish what you desire.

Frequently initial meetings with clients begin with the client telling us that they have adult children and they want their estate plan to provide for the inheritance to pass outright to their children. They indicate their confidence in their children; say that if they haven’t taught their children adequately by now, they aren’t going to worry about it. Without challenging those assertions, how should we mesh that thinking with the statistical probability that fifty percent of all marriages end in divorce or the existence of roughly 84,000 lawyers in Texas? Here are three things we encourage our clients to consider:

1. Community property vs. separate property. Inheritances begin as separate property in the hands of a surviving child, but income from that property is community property and the property itself can be commingled over time and become community property. Cash investments, such as insurance proceeds, are easier still to commingle and more difficult to protect.

2. Exposure to creditors. Even if property is kept as separate property, it does not protect the assets against exposure from creditors. Liabilities come in all shapes and sizes, but include credit card debts, home mortgages, business debts, divorces and lawsuits of all types. One axiom in our society seems constant – if you have money, someone else thinks they deserve it more.

3. Little additional cost. A separate trust for each child might cost an additional $200 in an estate plan but could provide for the child to be their own trustee either initially or as they gain experience or maturity. There would be an additional cost to have an income tax return for the trust prepared annually, but the entire amount of the principal might be saved by doing so.

As a result, we almost always recommend the use of children’s trusts to receive inheritances and substantial gifts. If you have any questions about your estate plan, give us a call.

Many of you may have, or might one day, awaken to a startling revelation: one of your parents is not exhibiting the responsible fiscal oversight of his or her finances. For as long as you have known your parent, there was scarcely a check you could inquire about that they did not only know why it was written, but could produce the hard copy receipt in nanoseconds. Now, the parent is covering up their indiscretions or is openly confused. You have grown into being one of his or her adult children yet, you could not have adequately foreseen this day, no matter how many books you have read.

Even more challenging is the common conclusion that your parent is not fully disabled or incapacitated. That would make things easier. The fact is your parent has just mentally slowed down. Black and white has turned to grey and there is no clear line of demarcation between the point where the parent can pay his or her own bills or handle money and the point at which the parent is no longer able to manage finances responsibly.

Children often grow to feel concerned and responsible. What if there is insufficient money? What if it is all lost or given away and none is left to take care of the parent? The burden might fall upon the children.

Yet, at the same time, respect for the parent demands gentleness and patience. The parent may resist any insinuation that they are slowing down. Independence has been a watchword of the parent for their entire lives.

We have a few ideas on how to address this, and more are being generated as we counsel with children and parents in these sensitive situations. Below are a few brief options you may want to consider if you find yourself acting on behalf of one or both of your parents:

1. A convenience account where a child can sign onto the parent’s account, volunteering to help pay bills.

2. A revocable trust in which the parent and a child can be co-trustees. This can allow the parent to continue to be “in control”, pre-plan for subsequent greater disability, allow the child to sign checks at any time, and ultimately avoid probate at the parent’s passing.

3. A revocable trust with a third-party as a trustee. The third-party can be an institution or a trusted advisor. While the parent may still control their own checking account, the trustee can make sure that bills can be attended to normally.

4. An irrevocable trust with the parent, children, and/or a third party as co-trustees. The main difference between this trust and the revocable trust mentioned above is the ability of the parent to alter the trust in the future. If a main concern is the lack of responsibility coupled with the possible influence of another person (such as, perhaps a second spouse), this structure allows some limitation on the ability of the parent to make swift and far reaching changes to the trust.

Balancing the need for action and the desire to honor parents and show them the respect they deserve is a challenge. Please let us know if we can help.