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Burkhardt Law

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Trust versus Beneficiary Designations

At least three times a week I am asked the difference between a will and a trust.  There are a few differences, but first I always like to point out that a will requires probate to be effective.  So, when planning for a client, I don’t often like to compare a will and trust, but rather a trust and beneficiary designations.

You can use both beneficiary designations and a trust to avoid probate, but the main reason a people choose a trust is control.  To me, control is the best reason to plan with a trust.  Legally, a trust is an entity that separates the control of assets from the use or benefit of those assets.

For families with minor children, I almost always recommend a trust.  Without a trust, even using beneficiary designations, you cannot avoid probate.  Minors cannot be in control of their own money, so a trust allows a legally responsible adult to make decisions over the assets for the benefit of the children.  It then sets up ages or life events when the children get the money.

Another common reason I recommend trusts are when there is real estate involved.  In Missouri, if a person has their name on real estate, their spouse also must sign off on any real estate transactions even if the spouse is not on the real estate.  So, if a person leaves real estate to someone through a beneficiary deed (the way to put beneficiaries on real estate), everyone on the deed plus their spouses will need to sign for the property when it is inherited.  Often, my clients would rather not involve the spouses or even have all beneficiaries make decision on the property.  Instead, they do a trust where one person makes decisions on the real estate and multiple people have the use or receive the proceeds.

One of the final reasons clients use a trust is to control how the money is paid out.  If a beneficiary is not responsible enough or has an addiction where the money would be harmful if the beneficiary had full access to the money.  In those situations, the trust can allow another person to use the money for the beneficiary or to give out money in regular installments like an allowance.

There are, of course, other reasons I consider trusts.  Family dynamics, contingencies, real estate.  However, when it comes down to it, the reason my clients choose a trust over a will or, more appropriately, beneficiary designations is it gives them control over how the money will be left.

 

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Why I Don’t Like Wills (But Still Sometimes Recommend Them)

One of my pet peeves is hearing about how because there was a problem with a will a person’s assets went through probate. I hate this sentiment, because it wasn’t a problem with the will, it was a problem with the person’s understanding of wills!

A will is essentially instructions to the court on how to handle the estate of a person who has passed. It is meant to go through probate. It is the only way for the court to verify the will is legally valid, the last created will, and give notice to those who are required to have it under the will. So a will is really a very poor legal document to rely on to transfer assets upon a person’s death.

Now, that being said, I still often times recommend creating a will. But I make very clear to my clients, the will is a back-up to whatever other legal device we are using to transfer assets upon death. Should an asset need to go through probate, wills allow a person to decide where assets should go and change intestate law. This includes leaving money to non-family or charities, as well as, disinheriting the intestate heirs.

A will can also reduce fees in a few different ways. First, it can reduce the signature requirements of all the heirs or people involved in the process, thus reducing legal fees. Secondly, a will can waive bond, which is another place that can cause additional fees. Finally, it can specify the Personal Representative (or Executor) and reduce potential legal fees if all of the beneficiaries of the will do not agree on who the Personal Representative should be.

And finally, for parents of minor children, a will is the only way to state their wishes for guardianship.

So for all these reasons, sometimes wills are necessary. However, I still don’t like them, hope to never need them, and rarely rely on them.

 

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Don’t Forget…. To Title Your Assets!

I meet with most of my estate planning clients three times and in each of those meetings I (try to) emphasize that an estate plan is truly controlled by how assets are titled. Of course the legal documents are important, I wouldn’t have a job if they weren’t. But the documents I create don’t mean anything unless we know how the assets are titled.

This is because it is really how an asset is titled that determines where the asset goes and if it will have to go through probate.

If there is a co-owner with a right of survivorship (this is generally called Joint Tenants with Right of Survivorship or JTWROS), then the property passes to the co-owner. This is also where trusts fall. In order for the trust to control, the title must be in the name of the trust and the trust must be the owner. The new owner under this ownership will have control and ownership completely outside of probate.

If there isn’t a trust as the owner or there isn’t a co-owner, then you look to see if there are beneficiaries. If there are beneficiaries, then they then own the property. And when I say beneficiaries, I also include Transfers on Death (TODs) and Payable on Death (PODs) designations. Again, these beneficiaries take ownership without probate.

It is only after ownership or beneficiaries that a will would control. If there are no co-owners and no beneficiaries, then whomever would get the property under the will is the new owner. However, a will must go through probate to transfer the property to the new owner.

And finally, if there are no co-owners, no beneficiaries, and no will, then intestate law controls and heirs get the asset. But again, the heirs would have to go through probate to gain access to the asset.

So, do me a favor, if you or a loved one has assets you’re worried about going through probate, CHECK HOW THEY’RE TITLED!

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What Type of Estate Plan Do You Need? Choosing the Right Estate Plan

When I work with clients, I see so many different family types and not everyone has the same needs. There are some generalities that I use to guide what plans the different type of families need. For instance, I think most families with minor children need a trust. However, even then, not all clients fall into those generalities. That’s why it’s so important to evaluate each family’s need individually through a consultation. However, even at the end of the consultation, I think it’s extremely important for a client to understand and choose their own estate plan. Part of this is understanding the documents and how they work, which I’ve explained many times. But another large part of choosing the right estate plan is knowing the different considerations that go into the plan.

One of my first questions when sitting with a new client is always about their family and who we’re planning for. The more complicated a family is (i.e. step-children, half-siblings, etc) the more likely a trust or a more complicated plan will be needed to ensure things go where they are intended. Missouri law only provides for a very traditional family and even then isn’t often what clients would want. Thus, legal documents are needed to change these “default” laws and the more certainty a client needs of where assets will go, the more complicated the documents get. It’s also important to know if there is anyone who would potentially challenge a plan.

But the biggest question and concern for me is if there is a need for control. This normally applies because there are minor children who cannot legally handle money for themselves. However, if there’s a beneficiary who just makes bad financial decisions or has a substance abuse problem a trust might also be necessary. There’s also a limited ability to keep spouses or in-laws away from a plan if they could potentially cause problems through a divorce or other issues.

Finally, assets also are an important part of deciding a plan. If there are extremely limited resources, it’s hard to justify the expense of a more complicated plan, but it might also be worth it if any of the above are concerns. However, the type and location of assets also may make a trust worth it or not. For instance, with real estate anyone listed on a beneficiary deed plus their current spouse must sign on any sale of that real estate. That can cause major problems if there are multiple people involved and not all work together. The need for one person to make decisions on real estate may be enough to justify a trust. However, on the other hand, if most of the assets are liquid (retirement money, bank accounts, etc.) and it’s simply a matter of dividing money, then a trust might be overly complicated.

There are so many factors that go into what kind of plan fits a family. However, the more you know about the process and why a particular plan might be right, the better decision you can make for your loved ones.

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Being a Parent: Planning for Children

When I first began my law firm, I started estate planning thinking of my brothers and sisters, nieces and nephews. Then when I had my first born almost three years ago, my perspective changed dramatically. Now as we prepare for our second child, I thought I would take a moment and reflect on how our estate plan has (and hasn’t changed) since children have come along.

The benefit of drafting your own legal documents is you can think ahead and prepare them for changes in the future. So, our documents from five years ago included provisions for future children. However, anytime a new addition is added to the family, the estate plan needs to be reconsidered.

This might mean a completely new structure. Going from a will to a trust. But it also means updating children’s names and very simple updates to make sure everyone is included.

It’s also an opportunity to make sure the people handling money and in charge of the children’s well-being are still appropriate. We had the trustee and guardian decided before Duncan arrived, but it’s amazing how the logically decision became so much harder once my son was actually here. In the end, I believe we made the right decision and we have not changed it. However, it’s mainly because I realize there is no right answer and no one can truly take our place if we aren’t here to parent. We can only choose and hope the transition would be as easy as possible.

Finally, it’s also a great time to review assets and make sure all assets will avoid probate and are included in your plan. If you’ve never talked to a financial advisor, it’s a great time to review life insurance as well as planning for the children’s future with 529s or other investments.

Now, I know many of my clients have children that are all grown up. However, those grownup children might have to start thinking about their own children. So, even if you’re not preparing for your own minor children anymore, it’s worth mentioning to your children for your grandchildren.

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Blended Families – Accidental Disinheritance – Burkhardt Law Firm

This week I presented at a personal finance college class and a topic that always seems to engage the students is what I refer to as accidental disinheritance. Unfortunately, I’ve seen this come up in several instances, but the most common occurs in blended families.

Husband and Wife both had children before they were married. Because they’re married, they’ve set up all of their assets jointly or have their spouse as the beneficiary on their individual assets. This is normal for most families, but the outcome isn’t always as expected.

When Husband passes, everything passes to Wife as intended, but it’s when Wife passes, that the family realizes things weren’t set up as intended. When Wife received the assets, Wife did not include H’s children as beneficiaries or did not put down beneficiaries at all. In either situation the outcome is the same, Husband’s children are not included. According to Missouri law, a widow’s assets go to her children alone, step-children are not included in intestate law. So, Husband’s children don’t even have a legal right to challenge Wife’s estate unless they were included in her will. And even if they are in the will, if she listed her children as the only beneficiaries, the beneficiary designations control over the will.

I like to believe in these situations that if Wife were informed, she would do everything correctly and Husband’s family wouldn’t have need to call me. But, of course, I get the phone call after the fact, and Wife has passed accidentally disinheriting Husband’s family. Or in some situations, Husband and Wife have met with an attorney and have set up their plan, but because they don’t fully understand the mechanics of the documents things go wrong.

For this reason, it’s extremely important that clients understand their documents and how they work. Especially in blended families, where when things go wrong, accidental disinheritance can happen.

 

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Decisions

When you begin an estate plan you are trusting and asking a lot of a few people to implement your plan. Often that can be overwhelming trying to choose the person. But it can be even harder if you have limited family or family that is not appropriate for the decisions they would need to make. A few things to help consider your options:

First, consider the role you are asking them to take. Are they handling money? Taking care of the kids? Making medical decisions?

Would they make the same decisions you would make?

Are they mentally and emotionally capable of making those decisions?

Is their age or physical limitations of concern?

If they are only making decisions on one part of your plan, will they work well with the others making decisions for you?

If they are not local, will that cause problems? Would it be difficult to deal with real estate? Are they interacting with the court?

How will they interact with your family or the others involved? Will they communicate adequately? Will they handle problems fairly and diplomatically?

But what if you really don’t have the option of families or friend fulfilling this role? It is possible for an independent party to act for you as at least a trustee. Banks, financial companies, and even accountants may accept this role. Often in an estate plan, professional advice is required, so hiring a professional trustee may make sense. It also puts a neutral third party in the role of the decider and can prevent family disputes and complications. However, professional services of course cost money and may not be practical for all families. As such, it’s very important to discuss options with an estate planning attorney and make the right decision for you.

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The Hierarchy of Estate Planning

After writing every month for the last 3 plus years, I sometimes find new topics to blog about difficult. But I often try and reflect on the most common topics that my clients have brought up over the last month. And this month I spent a lot of time explaining what I call the hierarchy of estate planning.

This is certainly not an official term or a concept I’ve seen discussed a lot, but I think it describes some of the concepts of estate planning quite well. What I’m really referring to is what controls a plan. Now, I’ve discussed this before and it also ties into the concept of inconsistency within an estate plan, but hopefully I can explain it just one more way for it to make sense.

How assets are titled control an estate plan. I break it down into four categories:

1 – Ownership/Titling

2 – Beneficiaries

3 – Wills

4 – Intestate Law

To determine how an asset would pass upon a person’s death, first look at who owns the property and how it is titled. If there is a co-owner with a right of survivorship (this is generally called Joint Tenants with Right of Survivorship or JTWROS), then the property passes to the co-owner.  This is also where trusts fall.  In order for the trust to control, the title must be in the name of the trust and the trust must be the owner.

If there isn’t a trust as the owner or there isn’t a co-owner, then you look to see if there are beneficiaries. If there are beneficiaries, then they then own the property. And when I say beneficiaries, I also include Transfers on Death (TODs) and Payable on Death (PODs) designations.

It is only after ownership or beneficiaries that a will would control. If there are no co-owners and no beneficiaries, then whomever would get the property under the will is the new owner.

And finally, if there are no co-owners, no beneficiaries, and no will, then intestate law controls and heirs get the asset.

So if you are trying to determine who would get an asset upon someone’s passing, take a look at the hierarchy of estate planning and figure out which category would control.

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Save Heartache & Money

This week I gave a presentation to a group of professionals I work with on a regular basis. After the meeting, several came up to me concerned that their plans wouldn’t accomplish what they thought it would. So, in the hopes of saving your family heartache and money, I thought I would the main point of that presentation.

When clients hire me to do an estate plan, my job is to avoid probate in the most cost efficient manner with as little conflict as possible. There’s two situations where probate is possible. First, is when a person is no longer able to make decisions for themselves.

If incapacitated and a person does not have any documents in place, the probate court gets involved in a guardianship or conservatorship. In these cases, the court appoints someone to make financial and medical decisions for you. That person must get court approval for any purchases and must make annual reports. Generally, in a time when they must already take care of a loved one, the court is the last thing they need to be dealing with.

This is very easy to avoid through a power of attorney or a trust. Either document may control if you’re incapacitated, but there are two main differences. First, a power of attorney will only control what is in your individual name, while a trust will only control what is in the trusts name. Also, a power of attorney ends upon death, while a trust may also control what happens after you pass.

The other side of planning is what most people think of: when someone passes. Without a will, assets go through intestate law and must go through probate. Even with a will, assets go through probate.

As such, I normally recommend non-probate transfers to be used to avoid probate upon death. This is a fancy term for joint titling, beneficiaries, or a trust. There are different benefits to each one, but generally a trust is the “best” option, while beneficiaries are “better”, and a will is “good.”

A trust is the “best” option because it allows for control over the assets while avoiding probate. Trusts are also very adaptable, permitting one to only change the trust document instead of beneficiary designations when life changes (i.e. changing beneficiaries, beneficiary percentages, and any restrictions on assets). It also can set up different layers of contingencies for beneficiaries and often provides the least amount of conflict between family members. It’s great for complicated families or when minors are involved. I also recommend it when real estate is involved, because in Missouri, if a person or people own real estate their spouses must also sign off on any transaction involving real estate. So, for families with multiple children, it’s a good way to limit the amount of people involved in any decision regarding that property.

Beneficiaries are the “better” choice because they avoid probate. But I generally only recommend them, with liquid assets, limited family members, and responsible beneficiaries.

A will is the “good” option because it goes through probate. This is necessary for families who do not want intestate law to apply and for minor guardianship. But because it goes through probate, there will be court and attorney fees and I rarely recommend it by itself.

So, in the holiday spirit save heartache and money for your family by checking the beneficiaries on your assets with this checklist!

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What Controls?

One of the most misunderstood topics of estate planning is what documents control a situation.  I often have people calling asking for a power of attorney, when they truly need to update how an asset is titled, or someone calls asking for a will when they really need to update a trust.  So, hopefully this month I can clarify what documents actually control a situation.  It all really depends on who legally owns the asset.

Titling always controls first.  If there are two people on the asset, then they have access to that asset.  Both signatures might be required, but often times (unless dealing with real estate or vehicles) one person may act without the other.

Often times, I have someone ask me about a power of attorney, but they actually mean another person is on their bank account or asset with them.  In that situation, the solution involves changing how the bank account is titled, not changing the power of attorney.

A power of attorney is when someone has an asset in their name, but a second person uses the document to access the first person’s asset.  The power of attorney may only be used when the person is still alive.  The most common time a power of attorney is used is when an individual is no longer able to make decisions and another needs access to his/her retirement accounts to provide for him/her.

However, if the asset is titled in the name of the trust (not in the name of the original owner), the trust controls.  If the original creator of the trust is not able to make decisions any longer the successor trustee takes over.  The successor trustee will have access to make decisions on the asset.  A power of attorney cannot apply in this situation because the person is not the owner the trust is.

When we start talking about when people pass, there are generally a few different ways for the property to be controlled.  First, again is who is titled on the asset.  If there is more than one name on the asset, the remaining name may be entitled to the asset alone.  It depends on exactly how the asset is titled. Generally, if the asset is owned by (and titled to) a married couple, the asset will automatically pass to the other.  If the owners are not married, it must state the asset is owned by joint tenants with right of survivorship for the asset to pass automatically to the other.

The title might again be in the name of the trust, and again, if that is the case, the trust document controls.  The successor trustee would take control of the assets and distribute or hold them as the trust document dictates.

If the asset does not have another person on the title as a current owner or is not in a trust, a beneficiary designation will control.  This might be a beneficiary deed on the house, a “TOD” or Transfer on Death on a vehicle, or a “POD” on a bank account, but if there is any form of a beneficiary listed, that beneficiary gets the asset.

It is only when there is no trust, other person, or beneficiary listed on the title that the asset would go through probate.  At that point, if there is a will the will would control, and if there is no will intestate law would apply.

While it can be confusing, the first step is always looking at the title.  A trustee will always control if it’s owned by a trust, a joint owner may be control, and only after that a power of attorney, beneficiary, or will.

Burkhardt Law Firm

Phone: (314) 518-1581
Email: mburkhardt@burkhardtlaw.com
Address:
2333 Grissom Dr., Suite 107
St. Louis, MO 63146