Do You Need a Will or a Trust?

We’re here with Attorney Denis Clifford, an expert on estate planning, the author of several books on wills, estates, and trusts, including the best-selling “Estate Planning Basics.”

QUESTION: Let’s start out. A lot of estate planning books recommend that a person planning their estate assemble a team of experts, including a lawyer, accountant, and a life insurance expert. This seems like an expensive proposition, so, tell me what your take is on that.

DENIS CLIFFORD: My take is, it’s a totally wasteful proposition for the average person; there’s no need for a “team of experts” at all. What you need is, first some good advice and understanding of what estate planning involves and how that applies to your situation. Many people don’t need anyone at all; with the help of a Nolo book, they can do all their estate planning themselves.

QUESTION: Two common ways to transfer property to people after your death: living trusts and wills. Just for those who don’t know the difference, perhaps you could give us a brief explanation of each.

DENIS CLIFFORD: Well, they’re both documents that transfer property when you die. The difference is a will is the traditional document that’s been used for many centuries, and you name the property or identify it some way, and name beneficiaries who receive the property. Almost all wills have to go through a process called probate, which is a court approval process, which is time consuming and expensive, and in almost all cases, provides no benefit except to the lawyers involved. A living trust is the alternative transfer method that does not require probate, by which you transfer all or at least most of your property to the same beneficiaries without the expensive courts and lawyers after you die.

QUESTION: Next is joint tenancy and tenancy by the entirety. Could you give us a brief explanation of what those mean?

DENIS CLIFFORD: Joint tenancy is a type of shared ownership between two or more people. And, in almost all states, each person has to own an equal share of the joint tenancy property. It’s most common between couples, whether married or not, owning real estate. The unique characteristic of joint tenancy is when one of the owners dies, the other owner receives the property “automatically,” outside of probate. Again, it’s a probate avoidance device. There are some complexities if you want to enter into joint tenancy just to avoid probate, which are discussed in my books. But for people who are buying property and want to own it in common, joint tenancy is often a very useful way to avoid probate of that, and, in fact, I own my house in joint tenancy with my wife. Tenancy by the entirety is a type of joint tenancy, and it applies in a number of states, particularly to married couples. It’s basically indistinguishable from joint tenancy, expect that you use different terms in the deed defining the ownership, and you use the terms as tenants by the entirety rather than as joint tenants.
QUESTION: Okay, I guess this next thing is sort of what I would call the Joan Crawford question, which is, if for some reason a person does not want to give any money to their children or spouse, do you have to specifically disinherit that person?
DENIS CLIFFORD: Well, first let me refer to “spouse,” and there’s two different situations here, depending on whether you live in what’s called a “common law state,” which is a vast majority of states in the United States, which derive their law from the English legal system, or the community property states, such as California, which derive their marital property law from a Spanish system. In community property states, each spouse owns half of the property acquired during marriage, no matter who “earned” it. In community property states, a spouse does not have any obligation to leave his or her half of the community property to the other spouse. In common law states, there are laws protecting a spouse from being disinherited from the other spouse, since one spouse may own all the property, it may be in his or her name, and the other spouse may get nothing in a will. So, there are laws that protect a spouse, and our Nolo rule is that, if you are going to leave your spouse at least half your property in a common law state, see a lawyer. As far as disinheriting children, you can disinherit any child you want to. You should do it specifically by saying, “I intentionally leave no property to my son, daughter, whatever,” because there’s a rule that says if you forgot to mention a child in your will, that child may be entitled to a certain percentage of your estate.

QUESTION: Can you tell me about the problem that might occur if you die and your children are still minors?

DENIS CLIFFORD: Well, in all states, children, meaning children under the age of eighteen, are not legally entitled to own outright a significant amount of property, the idea being that they are not old enough to responsibly manage it; they’re not adults, same as they can’t vote until they’re eighteen. So, some adult has to be responsible for having legal control and supervising any property or money you leave to a child. There are a number of ways you can do this. You can set up what’s called a gift in your will or living trust under what’s called the Uniform Transfers to Minors Act, in which you appoint a custodian. Often people will name their spouse or their mate, or if they don’t have one of those they name a close friend or relative or sister or brother to be the custodian, and that custodian manages the property until the child turns between eighteen and twenty-five, depending on the specific state, and when that state law says that the property has to be turned over to the child. There’s also a device called the Children’s Trust, which basically works the same as the Uniform Transfers to Minors Act, except you can extend the age at least up to thirty-five before the child gets the property. There are other devices as well, but those are the best two.

QUESTION: This term “pour-over will.” We can visualize the concept, but maybe you could explain that a little better.

DENIS CLIFFORD: Yeah, pour-over will is actually often used with a living trust. What it means is that the will directs that all the property subject to the will be poured over into the living trust. In other words, you leave most of your property by trust, but you say, “I have a pour-over will, and that says any property subject to my will after it goes through probate shall go to my living trust.” I think pour-over wills are rarely a good idea; that’s one of those things that has a fancy name, and some people like a fancy name, and lawyers like to push it because it makes more probate work for them. But there’s no reason to direct property to go first through probate and then into a living will. If you’re leaving some property by will it will have to go through probate more than likely, and then it might as well be distributed when probate’s done. To let it go through the will will hold up the whole process of transferring all the property through the living trust if it’s poured over. So, I’ve mentioned in my books a couple of instances where I think it might be useful, but in general, it’s not a good idea.

QUESTION: This is definitely going to be a basic question for you, but probably for a lot of people that are still not clear on the form that a will has to be in… in today’s world, can you have an electronic will? Is an oral will ever going to be valid, or a video format? Can you just tell us a little bit about the format that a will should be in?

DENIS CLIFFORD: Yeah, the answer to all those options is no, they are not legal in any states. Nevada has a statute that if they ever get sufficient identification mechanisms and procedures, so that we can identify who is speaking orally or on a video, then that could be a valid device, but there’s no recognition system that’s infallible or close to infallible right now. So the answer is, a will has to be a printed document and is subject to certain rules. In a minority of states you can have a hand-written will, but I discourage them strongly. They’re suspect by courts, they’re more strictly construed than other wills, there can’t be any erases or cross-outs, and it’s not hard, certainly with a Nolo book and a computer, to prepare a valid will following the requirements of state law. Then you print it out, sign it, have it witnessed, and it’s done.

QUESTION: Estate tax, a huge issue… is there a way to just give us a summary of the kinds of things that are commonly exempt from estate taxes?

DENIS CLIFFORD: Well, first of all, I don’t really think estate tax is a huge issue, except for millionaires; by definition, it’s only for millionaires, at least federal estate taxes, which are the ones that take the biggest bites. Each person has a two million dollar exemption from federal estate taxes when they die, so if your net estate is worth less than two million dollars, your estate cannot be subject to estate taxes. It’s a very small percentage, roughly one percent or less of the estates in the United States are now subject to estate taxes. It’s the kind of thing that people who are interested in protecting only the rich scream about, but in fact it concerns very few people. There are some state estate taxes, but they are much less significant, and there isn’t much you can do about them except move to another state, and it’s almost never worth bothering with that. If you live in two states and one has estate taxes, you might want to see a lawyer to see how you can transfer your residence to the other state if that state doesn’t. In terms of other exemptions, the major other exemption from federal tax is any property, no matter worth how much, that you leave to your spouse, is exempt from tax. Also, of course any property that you leave for legitimate charitable purpose is exempt from tax.

QUESTION: Okay, I was duped as many people were in 2001 into believing that estate taxes were repealed. But that’s not true?

DENIS CLIFFORD: No, for various technical and other reasons, the estate tax was not repealed. The Republicans put through a particularly wacky law that raises the amount of exemptions; it’s now at two million per person, in 2009 it’ll go to 3.5 million per person free of federal estate tax. In 2010 the estate tax is repealed for one and only one year. In 2011 the estate tax comes back and currently the exemption will be lowered to one million dollars. There has been a considerable and extensive political fight in Congress over whether they are going to permanently repeal the estate tax or not. Personally, I think repealing the estate tax is a disastrous idea, leading to creating, even more than we are now, a class of inherited wealth, sort of like the Bourbons in pre-Revolutionary France. And, the cost to the treasury, although only one percent pay estate tax, the amount they pay is many billion dollars a year because of the class of wealthy people we’ve created in this country. And to enable them to pass their wealth on forever without any tax seems to me an abomination.

QUESTION: Let me just get one thing clear on that. You mean if you die on December 31, 2010, there is no estate tax, but if you die the next day, there’s a one million dollar exemption and that’s it? Is there a way to tell when it’s time to seek an attorney’s advice? Are there any simple guidelines?

DENIS CLIFFORD: Well, I was thinking about this, and the answer is yes and no. One simple guideline is, if you feel insecure, or just don’t want to do the work or are, you know, the kind of person that always wants a paternal figure or a maternal figure to say you’re okay, so, one way to look at it is a subjective thing. I say you should start with some solid information about what your situation is and what your estate planning option is, and personally, obviously I believe the best way to get that information is through Nolo Press resources. In our Nolo resources, we often have little sites saying, “If you’re in this situation, see a lawyer,” because there are a number of situations, many in estate planning, where I think, “We can’t explain this well enough; it’s such a relatively unique thing, and it’s fairly complicated; go see a lawyer if you’re in this situation.” So, another approach to it is to read through the Nolo resources applicable to you, and see if you fall under these categories where there are little red flags saying, “Consider seeing a lawyer.” But let’s take a couple of average situations. Whether you’re single or not, and you have some children and maybe a grandchild, and basically you want your property to go to them, or maybe your spouse and then to them, unless there are some complicated tax problems or other problems, you can state what you want in a sentence or two. There’s no reason to have to run to a lawyer and say, “I want to leave my property to my kids; can I do that?” Of course you can do it, and with the proper legal forms, which Nolo provides, you can do it without seeing a lawyer. So I think you should start with the confidence that “I can figure this out.” And if you can’t, then go see a lawyer.