In parts One and Two of Dragon Law Group’s Estate Planning Blog Series, we discussed what happens to someone’s estate when he does not have an estate plan in place. We also discussed fundamental differences between a will and trust.
Until now, we primarily discussed how estate planning tools are utilized for gifting the deceased assets to whom they want to. Now we turn our attention to the more fantastic benefit estate planning offers; allowing control of your money to ensure your loved ones remain cared for long after your death.
Consider the following scenario: Lisa is a thirty-five (35) year old single mother of two twin boys (age 4). She worked for a start-up company for the last ten (10) years. A Stanford graduate, Lisa paid off her student loans last year.
This year, Lisa’s company went public, and her stock options generated 1.5 Million. Lisa needs to know what to do with her wealth.
To make sure her children are cared for if something happened to Lisa, Lisa should create an estate plan sooner rather than later. Lisa is concerned with the following:
· If Lisa dies, how can she ensure her children are taken care of?
· If Lisa gets married, how does that affect her estate and children?
· How can Lisa continue to positively influence her children if, God forbid, something happens to her?
Let’s explore the options available to Lisa:
1. Lisa does not create an estate plan (Intestate Succession).
Lisa obviously should not default to this option, and the consequences may be severe. With no will or trust, the probate Court will default to the intestate succession rules. Assuming her children are minors, upon Lisa’s death, and assuming she is not married, and her children survive her, then her children will split Lisa’s inheritance 50/50. Legally speaking, one cannot own property or money until one turns 18. So the Court will deposit the funds and assets in trust until Lisa’s children turn 18. To do that, the Court needs someone to manage the money for the children’s benefit, in the meantime, referred to as a property guardian.
This could happen in one of two ways: Either someone petitions the Court to act as the property guardian, or the Court selects its own guardian. For example, perhaps Lisa has a sister, Amanda, who wants to manage her nephews’ funds. Amanda will have to petition the Court to do so. The Court will then thoroughly examine Amanda’s background to determine if Amanda is qualified to do so. Amanda will need an attorney to assist her, compounding the attorney fees already incurred in administering Lisa’s estate. All the Court and attorney fees will be paid from Lisa’s estate, leaving less for Lisa’s children. Worse, if the Court denies Amanda’s petition, someone else will have to file a new petition costing even more money.
While this is just one example, essentially, Lisa’s choice to forgo an estate plan leaves her children’s fate to chance.
2. Lisa Drafts a Will.
Obviously, it’s prudent for Lisa to create an estate plan to avoid the pitfalls of not doing so. So, Lisa considers a will.
A will can put Lisa’s children in a better position. Lisa can jot down whom she wants to act as the property guardian, whom she wants to take physical care of her children, and how she wants her children’s inheritance managed and invested. But a will alone is defective. Whether Lisa dies with or without a will, once her children turn 18, the property guardian’s job terminates. At 18, all of Lisa’s money belongs to her kids without any oversight.
If Lisa passed today, she has 1.5 million in cash when her children are only 4. Assuming that money is properly invested in the following 14 years, it will grow substantially when her children turn 18 years old. Unfortunately, most 18-year-olds don’t manage money wisely. Lisa's sons might recklessly spend that money by the time they are 20. Thus, in the worst-case scenario, her sons will be broke with nothing to fall back on. Lisa hopes that her 4-year-olds will be responsible by the time they turn 18, but the reality is that very few of us are.
Another issue with a will: At the time Lisa writes her will, she is unmarried. But perhaps a few years down the road, she is re-married. Nevada is a community property state. This means that married couples own everything jointly and equally. When one spouse survives the other, all of the deceased spouse’s money transfers 100% to the surviving spouse (There are some exceptions to this rule, but it’s a different complicated topic). For Lisa, her will is now useless. How she wishes her money to be spent for her children passes with her. Her surviving spouse is under no obligation to do anything with those assets. Lisa’s only hope is that they will do the right thing (I wouldn’t count on it).
As you can see, in terms of caring for her loved ones after she dies, Lisa won’t put them in that much of a better place had she not bothered to draft a will, to begin with.
3. Lisa Creates a Trust.
Lisa then considers utilizing a trust. For Lisa to grasp the concept of a trust, she first thinks about what she might do with her money in the coming decades. Lisa, a Stanford graduate, wants her kids also to attend Stanford. So she decides that she will probably gift each son a new car when they graduate. Hence, they have extra incentives to graduate from Stanford.
While Lisa is alive, doing so is simple enough. If her son graduates from Stanford, she can decide if she still wishes to gift him a car. But of course, Lisa can’t do so if she dies before her sons graduate. This is where the trust comes in. It’s a tool that allows Lisa to use her money the way she wants to, even if she dies.
The uses of a trust in this manner are almost endless, and a plethora of positive results can be achieved. Let’s consider Lisa’s issues to flush these positive results out further.
Issue: Lisa’s concerned that her children may irresponsibly manage their inheritance when they turn 18. Solution? Lisa puts the money in trust. The trustee (the person or entity that manages Lisa’s trust funds) oversees the trust funds. The trustee will invest the funds for the children’s benefit.
Issue: Lisa wants incentives for her kids to attend and graduate from Stanford. Solution: Lisa instructs the trustee to gift $50,000.00 to her sons when they graduate from Stanford.
Issue: Lisa doesn’t want all her money to go to her future spouse. Solution? By depositing her money into her trust, Lisa no longer owns the trust’s money; the trust does. But Lisa has complete control of the trust funds to do whatever she wants with it. Because the trust owns the funds, Lisa’s future spouse will never own it, and the community property laws do not come into play.
Hopefully, this article sheds light on the power of proper estate planning. Remember, a thoroughly drafted estate plan allows the drafter to have nearly total control of their money long after the drafter passes. A trust can be utilized in an almost infinite number of ways. In this example, we looked at a single mother with two children. But grandparents, or anyone else, can create trusts to accomplish the same types of ideas. The next part of the series will examine more specifics of these types of ways.
Please Contact Dragon Law Group if we can assist you in creating an estate plan or if you have any questions about estate planning.
Please note: the contents found on this website are not legal advice and is strictly intended for educational purposes only. The legal needs of each individual vary significantly and are dependent on a variety of factors relevant to their specific needs.