When a loved one transitions from life into death, remaining family members must sort through the complex and often frustrating laws governing wills, estates, and the law in general. A process was developed to handle or manage the wills and estates of the deceased in 1784 Massachusetts, patterned after early English religious courts that had jurisdiction over the probate of wills and the administration of estates.
The word “probate” comes from the Latin word “probare,” meaning “to prove.” Probate is a court-guided process in which a deceased individual’s financial affairs are concluded and the Court determines who the proper beneficiaries will be. The idea that probate is guided by the courts should immediately alert you that it will be an expensive endeavor in both personal time and money.
There are numerous stories of families arguing over the personal property of a deceased individual, often causing irreparable harm to those relationships. Relationship dynamics are often destroyed when money and the distribution of property is involved. Last Will and Testaments are somewhat helpful, though even then much of the distribution is challenged by those who feel they were somehow slighted in the loved one’s Will.
A Last Will and Testament is an instrument designed for the purpose of determining the specifics of distributing the deceased’s property and money. However, the Will is always used in probate.
Lawrence spent his last years lonely and afraid. Arthritis kept him from leaving his Boston apartment. As he became unable to care for himself, Lawrence, in his late 70s, feared he would wind up in a nursing home. He had no close relatives to turn to. Then his friends stopped visiting him, and he didn’t understand why. There was only his live-in caregiver.
In December 1991, a year after his caregiver moved in with Lawrence, the old man signed a will that left his principal asset—a six-unit apartment building worth well over $1 million—to his new companion.
Lawrence died in 1993, at age 82. His caregiver submitted the will for probate. But then two close friends of Lawrence’s who had cared for him before the caregiver moved in, asked the court to throw out the 1991 will and to probate instead a will executed by Lawrence in 1989 that left the building to them.
The legal battle raged for 14 years, going from probate court to appellate court back to probate court and then up again on appeal. The legal fees for just one of the parties ran into the mid-six figures.
When Liz’s fiance died suddenly, she was left with the headache of sorting out his will, alongside his former wife. After almost two years of weekly visits to his home that billed out at full firm billing rates, the estate ran out of cash to pay the lawyers. Only when the check book went dry was the probate firm ready to release his real and personal property to the rightful heirs. There was no cash left to keep paying the firm’s monthly billings.
In fact, the estate was drained of its cash holdings (well over $100,000) and was in the hole another $10,000 for attorney billings when the keys to his home were turned over. Those keys cost Liz $10,000 out of their own pocket until such time she could sell some of the inherited assets. In short, the estate was raided of all its cash for “administration fees, then forced into debt before the probate attorneys decided it was time to let go and declare it “settled”.
The case then became tied up for another several months in probate due to mishandling of the original estate. By the time it was all said and done, Liz owed much more than the estate had been worth.
The Probate Court oversees numerous types of trusts, including testamentary trusts which are established by a decedent’s will, inter vivos trusts which are established by an individual during his or her lifetime, wrongful death trusts which are established by the Probate Court for the protection of minors who receive funds from the wrongful death of a relative, and supplemental needs trusts to provide a higher quality of life for the disabled.
In order to avoid the inherent perils of probate, you can create an irrevocable or revocable trust. The simplest difference between the two is that assets remain in the grantor’s estate in a revocable trust but move out of the estate in an irrevocable trust. The primary reasoning behind the irrevocable trust is that there are many good reasons for clients to want to move assets out of their estate.
In a revocable trust, the grantor maintains ownership of the assets. An irrevocable trust moves those assets out of the trust maker’s hands, and the grantor is no longer considered to own them. An independent trustee makes all the decisions regarding investments on behalf of all the trustees, which may or may not include the grantor. However, keep in mind that transferring assets through an irrevocable trust can result in gift taxes being owed.
Additionally, the assets in a revocable trust remain in the deceased’s estate. What benefits does a revocable trust have, aside from the obvious one that the grantor can revoke it?
Many grantors create a revocable trust to avoid probate, which it certainly does. If the grantor of a revocable trust becomes incapacitated in managing their affairs, the designated trustee steps in to handle the assets.
Creating a revocable trust is probably the best way to ensure that your property remains available to be used for your benefit, should you become physically or mentally incapable of managing your own affairs. While continuity of management is also possible when a durable power of attorney is signed, third parties such as banks, brokers and transfer agents often have more difficulty in dealing with a power of attorney than with a trust agreement.
If you become somehow incapacitated and you have neither a revocable trust nor a power of attorney, an expensive, lengthy, and potentially embarrassing court proceeding is generally required to appoint a conservator or guardian before your property can be used to benefit either you or your family. Even after a guardian has been named, continued court supervision over the management of investments and disbursements is usually required. This can include annual bond fees, annual accounts and additional legal and accounting fees. Allowing a court to have a say in the matter defeats one of the main reasons a revocable trust is formed: to avoid probate.
One of the primary benefits of creating a revocable trust is the ability to provide uninterrupted investment management should the grantor become disabled, as well as after the grantor’s death. Assuming the assets were previously transferred into the trust’s name, there is no need to reregister securities after death. In addition, depending on the cash needs and investment objectives of the grantor’s estate, there may be no need to develop a new investment strategy.
While there are a few disadvantages that may apply to using a revocable trust instead of a will, they are not substantial enough to weigh heavily against the use of such a trust. These arise from the different treatment of trusts and wills under certain property laws.
The primary benefit of creating a revocable trust is that it provides a prearranged way that will ensure the continued management and preservation of your estate and assets, should you become incapacitated. It can also set forth all of the dispositive provisions of your estate plan. Due to changes in tax laws, most revocable trusts can be treated as part of the deceased’s estate for federal income tax purposes.
Consequently, a revocable trust is also now afforded certain post-mortem tax advantages that are enjoyed by your estate, including to report its income on a fiscal year basis rather than a calendar year.
Revocable trusts are not necessarily for everyone. Whether a revocable trust is appropriate for you and your beneficiaries depends greatly on your specific needs and circumstances. Although the advantages of creating a revocable trust usually outweigh the disadvantages, the decision to create a revocable trust is complicated and requires a thorough legal analysis that considers all of the above factors as they affect each individual and family.
Blake Harris Law and attorney S. Blake Harris is knowledgeable in creating plans that protect his clients’ wealth both during and after their lifetimes. For a consultation or to get answers to your estate planning questions, contact him at: