Estate Planning FAQs
Commonly Asked Questions about Estate Planning
- Why should I have a will?
- If I do not have a will, my property goes to the government on my death, right?
- If I do a will, there is no probate, right?
- If I have a will, I do not have to pay estate taxes, right?
- What is this living trust that I see advertisements and seminars about?
- If I do a health care directive, that means that I am more likely to become an organ donor, right?
- If my attorney does a living trust for me and also does a will for me, the attorney is doing more for me than I need, right?
- How can I avoid probate?
Why should I have a will?
- You own property in your name alone and want to specify who will get it when you are gone.
- You or your spouse has children from another relationship.
- You have minor children and need to name who would raise them and handle their money for them until they are grown.
- You have a person you want to leave money to who is disabled.
- You want to pick who will be the person who administers your estate.
If I do not have a will, my property goes to the government on my death, right?
No. If you do not do a will, there is a statute called the Intestate Succession Statute that says who receives your property. The legislature tried to guess what people would want and provided for your spouse and children to take first and your closest blood relatives after that. Return to top.
If I do a will, there is no probate, right?
Probate refers to the process that has to gone through to get your debts paid and the property distributed where it belongs. So, the will tells us what to do, but whether you have to go through probate or not depends on what kinds of assets you leave.
Assets like life insurance, IRAs 401(k)s, jointly held property, transfer on death (TOD) or pay on death (POD) designations and transfer on death deeds (TODDs) have named beneficiaries and so those assets do not normally have to go through probate.
Assets in your name alone or held with someone else as tenants in common are assets that have to probated. Return to top.
If I have a will, I do not have to pay estate taxes, right?
The issues of what assets are subject to the will and whether the government will assess estate taxes are totally different issues.
First, only large estates are subject to estate taxes. Right now estates have to be over one million dollars for the State of Minnesota to assess an estate tax.
Second, the government will include in the estate tax calculation all assets you owned, regardless of whether those assets are governed by the will or not. Life insurance, IRAs and so on that are not governed by the will and are not “probate” assets will still be included in the tax calculation. Return to top.
What is this living trust that I see advertisements and seminars about?
A living trust (sometimes called an inter vivos trust) is a trust that you establish during your lifetime. Unless you establish an irrevocable trust, you retain the right to change it any way you want to in the future. Normally during your lifetime you are the trustee and the beneficiary. Because of a peculiarity of the probate statute, assets in the trust are not subject to the probate process. They go under a different set of rules called trust administration. In New York, California and Florida, that distinction is huge. In Minnesota, it is less important. Return to top.
If I do a health care directive, that means that I am more likely to become an organ donor, right?
These are totally separate issues. You can specify in your health care directive instructions about organ donation but the health care agent does not automatically have the right to donate your organs. You have to give the health care agent the power to donate organs affirmatively. Return to top.
If my attorney does a living trust for me and also does a will for me, the attorney is doing more for me than I need, right?
It is normal to do a will for someone who is also doing a living trust. In order for the living trust to work, all significant assets have to be in the trust. The purpose of this will is to make sure that any assets not in the trust are added to the trust and go where you want them to, or if there is litigation after your death (think bad car accident) that you have named who would be your personal representative. Return to top.
How can I avoid probate?
The short answer is by planning ahead.
Many people have the impression that if they do a will, that means they have avoided probate. This is not true. Doing a will is a good thing. Doing a will allows you to say what you want to have happen to your assets once you are dead and who you want to act as personal representative or do other jobs like act as trustee. It allows you to deal with a lot more contingencies and establish trusts to hold any assets going to minors or disabled persons. However, the will just tells us what to do during the probate. It does not avoid the probate process.
So, what can you do if you want to avoid probate altogether?
One thing you can do is put all your assets in a living (revocable) trust. The trustee will follow the instructions in the trust agreement about what to do on your death. The bills will be paid and the assets distributed through what is called a trust administration, not a probate. In Minnesota, a trust administration is not a lot different from a probate. If there are no disputes, the will can be administered informally and then the court involvement will be minimal. But if there are no disputes, the court does not even have to be involved in a trust administration at all. This saves at least $320 because there is no filing fee. Also, there is no mandatory waiting period before the assets can be distributed in a trust administration as opposed to a four month waiting period for a probate. On the other hand, assets in a trust administration should not be distributed until all bills have been identified and provided for. If you have been sick just before you died, it may take some time for the health care providers to finish billing. In a probate, once that four month waiting period has ended, if creditors come in late they can be barred. There is no such statutory bar in a trust administration.
The other way to avoid probate is to name beneficiaries on all of your assets. For things like retirement accounts and life insurance when you set up the retirement account or buy the life insurance policy, you will be asked to complete a form naming beneficiaries. The process is simple and easy.
For other assets like bank accounts, stock accounts, certificates of deposit or bonds you can ask the bank or brokerage firm to add a pay on death (POD) or transfer on death (TOD) designation to the account. Again it is simple and easy but you have to ask the bank or brokerage firm to do this. They will not necessarily suggest it. Also be careful not to let the bank officer or stock broker to tell you that making the account joint with your family member (sometimes referred to as adding another person’s name to the account) is just as good. It is true that making a person a joint owner on the account means that those assets go to that person on your death if that person survives you. However, you have also given that person the power to take those assets and use them during your lifetime. You do not make such a lifetime transfer by adding a POD or TOD designation to the account.
For real estate there is a new document that you can sign that is like the POD or TOD designation for liquid assets. It is called the Transfer on Death Deed (TODD). Again, this is superior to making a person a joint tenant or reserving a life estate and giving someone a remainder interest because it does not actually transfer anything until you die. The house remains your house and if you sell it you get all the proceeds, which is not true if you have made relatives joint tenants or transferred a remainder interest to them. If you are interested in more information on TODDs look for the FAQ: What is a Transfer on Death Deed?
Given that it is possible to avoid probate all together, why doesn’t everyone establish a living trust or name beneficiaries for their assets?
In New York, California and Florida, the probate statutes make it expensive and cumbersome to probate estates. As a result, if you talk to a lawyer in those states, the lawyer will advise you to set up a living trust. In Minnesota, the probate statute is not particularly onerous and so doing a living trust is just an option. Some people find the idea that they no longer own their assets but are in title only as trustee for themselves as beneficiaries burdensome. If the idea of being trustee for yourself does not bother you, then a living trust may be a good option. A living trust does increase your disability protection because you have named a person to take over from you and that can take place while you are alive but not functioning. It is a good way to keep information private (probate is a public process). It is also a good way to deal with owning real property in more than one state. Even if every state has a reasonable probate statute multiple probates can expensive and cumbersome.
The disadvantage of using POD/TOD/TODD and beneficiary designations to avoid probate is that it is not as flexible as a will or trust. Beneficiary designations on retirement accounts and life insurance and TODDs do allow at least one contingency to be handled (What if Child A dies before you? Who gets what would have been Child A’s share?). However, most POD or TOD designations do not even allow that. Furthermore, if you need to have trusts established for minor or disabled person or want to control where an asset goes when the first beneficiary dies, POD /TOD/TODD alone will not get the job done. You can establish a trust, either separately or in a will or living trust, and then use a POD/TOD/TODD designation to get the asset to the trust but it not then clear that you have really simplified matters.
If you wish more information or wish to discuss these issues, please call us.