Trust & Estate Planning & Law
Trust and estate planning is an important part of financial planning. The number of people who own primary residences and who have invested in real property has increased greatly over the years. Further, the general public has become more sophisticated about investing, due in part to the fact that many people contribute to employer-sponsored investment plans. Thus, it is important for individuals to plan for their retirement, for the possibility of becoming mentally or physically impaired, and for the distribution of their estate and assets after death. Trust and estate law continues to be one of the growing areas of legal practice and will continue to grow as the baby boom generation enters into retirement. Moreover, there will be a tremendous transfer of wealth as that generation passes on. This article presents an overview of the basics of trust and estate law as well as a brief discussion of the issues that can arise with respect to disposing of estate property.
Keywords Administrator; Alternative Dispute Resolution (ADR); Beneficiary; Estate; Executor; Guardian; Irrevocable trust; Probate; Revocable trust; Trust; Trustee; Will
An estate includes all of a person's property: an owner-occupied primary residence and other real estate, cars and furniture ("tangible personal property"), and insurance policies, bank accounts, stocks and bonds, and social security benefits ("intangible personal property"). The purpose of estate planning is to manage the estate when a person is alive in order to arrange for the estate's disbursement after a person dies. The first step in estate planning is for one to prepare a last will and testament. A will is a revocable document that establishes how one's property should be transferred upon one's death. In addition to wills, there are other investment vehicles that transfer a person's property. These include pensions, jointly owned property, gifts, and trusts. Moreover, life insurance policies and certain bank accounts that contain a right of survivorship take effect when a person dies.
All aspects of financial and retirement planning should include estate planning. Estate planning should also include a plan for the possibility of mental and physical incapacity. One way to achieve this is by establishing a trust. Essentially, a trust establishes a legal relationship in which one party assumes control of an estate or assets for the benefit of another. This allows a person to select someone to manage their estate while they are alive by designating a trustee who is responsible for holding and managing property for the benefit of the beneficiary. There are different legal and tax implications that apply to wills and trusts, and a person considering trust and estate planning should consult with an attorney and a tax accountant.
In order for a will to be considered valid, there are certain basic legal requirements.
- First, in most US states, a person must be eighteen years of age, although this can vary (an attorney can verify the applicable state law in this regard).
- A person must also be of "sound mind and memory" to draft a valid will. This means that a person must be aware of the fact that he or she is executing a will, and of the property included therein. This is especially relevant today as more people are being diagnosed with Alzheimer's disease or other forms of age-related memory loss or dementia. Any question concerning the mental capacity of the person making the will, or the testator, at the time the will was executed, can result in the will being contested during probate.
Probate is the legal process that verifies the validity of the document and allows for the legal distribution of the assets or property included in the will.
- A will must also include specific language that disburses the person's property and verifies that the person intends the will to be their final word in that regard.
- Further, the document must be signed by the person unless they are incapable of doing so because of illness, injury, or illiteracy. In such cases, a lawyer, a person appointed attorney-in-fact, or a witness can sign on the person's behalf.
- The will must be properly executed and witnessed (usually by two people). The witnesses, moreover, cannot be family members, beneficiaries, or business associates. That means that the witnesses must be "disinterested parties."
- Finally, the will should include a clause attesting that the document is the person's "final will and testament," and the will should be dated, notarized, and also indicate the place of signing.
There are also other legal matters to consider.
- The state law that governs a person’s will is the state where the person maintained their primary legal residence; this is also referred to as "domicile." If a person dies without having established a will, the property must still be distributed. (This is referred to as "intestacy" or that a person died "intestate.") In such cases, an interested party who may have a beneficial interest in the decedent's property can petition the probate court to be appointed as the estate's "administrator."
- When a person dies with an established will (also referred to as "testate"), a person is appointed to be responsible for ensuring that the directions of the will are followed. Such a person is known as an executor. In either case, whether someone dies testate or intestate, the executor or the administrator, respectively, is responsible for disposing of the estate property.
- Finally, there are certain kinds of property that are not transferred in a will, and this includes, but is not limited to, property that is jointly owned, life insurance that has a designated beneficiary, and property held in a trust.
A trust is another effective planning tool in estate planning. As indicated above, a trust establishes a legal relationship with a "trustee" who holds property for the legal benefit of the beneficiary. In a living trust, the person establishing the trust can also be the trustee as well as a beneficiary of the trust; a living trust is usually established as a means to avoid probate.
In addition to holding property, the trustee is responsible for safeguarding the trust and distributing the trust income or principal to beneficiaries as required by the trust document. Any type of property, that is, real property, personal property, money, stocks and bonds, and even business interests, can be held by a trust. While there are many types of trusts, they fall under two broad categories, revocable or irrevocable. A revocable trust is one in which the terms can be legally changed. A revocable trust can be terminated by unilateral action of the person establishing the trust without court approval. An irrevocable trust is one that cannot be terminated without formal approval by a court with jurisdiction. The terms of an irrevocable trust also cannot be modified without such approval.
In either case, the trustee takes legal title to the trust property while the beneficiaries have an "equitable title interest" (such an interest simply means that beneficiaries have a legal interest to the trust’s assets as set forth in the trust). In addition to taking title to the property, the trustee is required to manage the property in accordance with the terms of the trust. The beneficiaries can assume ownership in a number of ways, all of which must be specified in the trust document. For example, if the person who established the trust dies, and property has been bequeathed to a beneficiary and the beneficiary is capable of assuming ownership, the property will be transferred. In some cases, a beneficiary may not be capable of receiving the assets because they are a minor or because of a mental or physical incapacity.
In such cases, the beneficiary will be required to have a legal guardian. A trust often includes directions in this regard and appoints a guardian, but in the event the trust does not contain directions for this circumstance, the court will need to appoint a guardian. Either the trustee or a...
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