To Plan or Not To Plan… There’s No Question

May 28, 2021

Estate planning. In my experience, estate planning is not on the top of peoples’ ‘to do’ lists, and many of my clients tend to procrastinate simply because of the difficulty of having to contemplate your own passing. Therefore, the more we communicate and the better grasp you have on the issues, the better off you and your heirs/beneficiaries will be in the future.

The major issues that must be dealt with when someone passes away, in no particular order, are 1) payment of last expenses 2) probate, if required, 3) estate taxes, and 4) privacy.

1. Last Expenses

When someone passes away, typically the decedent’s funeral expenses are paid out of their estate by someone authorized to access an account. Assuming the situation where the deceased was not married, it is common that a bank account is held jointly with a child or other trusted individual so that the individual has immediate access to funds of the deceased to address any dire financial needs. Although not favorable, it is also common that a child/friend pay immediate costs out of pocket until such time that an estate has been established and the individual can be reimbursed by the estate of the deceased.

The joint bank account arrangement is not ideal because the joint assets are subject to creditor claims by creditors of either the decedent OR the joint account holder. By way of example, mother adds daughter to bank account just so daughter has access in case something happens to mother. Daughter gets sued, files bankruptcy, or experiences some other event in which a creditor has the ability to seize daughter’s assets—the funds in the joint bank account, or any account that daughter is named on, are susceptible to that judgment. That means the mother’s bank account, that she holds jointly with daughter, could be wiped out. The option of someone else paying out-of-pocket and getting reimbursed later is not favorable for obvious reasons.

To avoid this issue entirely, the best option is to place the bank account in trust and name a child/trusted friend as a successor trustee. When the trustee/account holder passes away, the bank will not require court paperwork, but instead can grant access to the successor trustee almost immediately upon receipt of a death certificate and other requested information that will not take long to compile.

2. Requirement of Probate

Wills v. Trusts. Whether an estate must be probated is determined by a) the value of the assets (in excess of $150,000), and b) the estate plan (or lack thereof) that you have in effect at your passing. A pair of tools commonly used in estate planning are known as a Last Will and a Living Trust, with both serving similar purposes but one being far more effective than the other at accomplishing goals:

Wills. Wills are simply a set of instructions for someone to follow when you pass away. Wills become public information upon passing away and have limited tax planning ability (important, because tax laws are constantly in flux). Wills have several drawbacks, such as:

  • Cannot perform efficient tax-planning functions;
  • Do not provide for any privacy – become a public document upon death/filing;
  • Must be filed with County within 30 days of death (criminal offense to not file timely);
  • May result in your estate and heirs/beneficiaries being forced to go through probate;
  • Not easily changed;
  • Are administered pursuant to the Probate act;
  • Easily contested, meaning someone can challenge the Will and have it invalidated;
  • Must provide notice of death through publication in the newspaper, making potential creditors aware of the passing and creating a target for creditors and scammers;
  • Probate average of 2-3 years to finalize.

Because the court clerk in Cook County typically schedules a second court date that is fourteen (14) months after the initial date, even the Court does not anticipate progress in getting everything finalized for at least that long. Again, the average is 2-3 years to complete estate administration.

The court basically supervises the distribution of the property to ensure distribution in accordance with a Last Will, or with State law in the absence of a Last Will. The probate statute is lengthy and compliance is difficult and time consuming. In Cook County, it is not uncommon that an attorney who handles a probate estate with a gross value of $1 mil, collect potentially $50,000 in fees. While this may appear absurd on its face, it is the cost of not taking care of financial affairs and can only be avoided with proper estate planning. Ultimately, wills do not serve a purpose if you have a proper estate plan. There are thousands of horror stories of families that were forced to go through probate, with celebrities being only the more known situations simply because of the publicity (Aretha Franklin, Michael Jackson, Howard Hughes). The reality is, those with less assets than the typical celebrity are more intensely affected.

Trusts. Trusts, on the other hand, are a very effective estate planning tool. A trust is a separate entity that is a paper creation which you use to take property out of your name and put it into the name of your trust. If done properly, this simple process allows you to avoid probate entirely. I tend to compare a trust to a ‘magic box,’ where you are removing property from your ownership and putting it into this ‘magic box’ that you control. Bank accounts would be retitled to have the name of your trust (i.e., The John Doe Revocable Trust), and other assets would be simply listed in your trust (jewelry, other personal gifts of sentimental value). In any case, by taking everything out of your name and putting it into the name of the trust, you are saving thousands of dollars by avoiding probate. Additionally, your family gets to avoid the headache and heartache of having to deal with legal issues instead of mourning the passing of a loved one. There are numerous other problems avoided with the execution of trust that I will be glad to discuss further.

Also, trusts are totally private – while a court would be a governing body for a will, there is no governing body for a trust. The only party entitled to see the actual trust document is the Trustee. A good trust also contains proper plans for potential estate taxes, which a will cannot do. If assets are at a certain dollar amount upon someone’s death, the government will require taxes be paid on the value of those assets that are being bequeathed. As important, creditors will not have easy, public access to your financial information. I can also further explain the tax benefits in the future.

To summarize, a trust:

  • Remains completely private;
  • Allows for proper tax planning;
  • Are administered pursuant to contract law;
  • Allows for contingency plans;
  • Allows for ease of change;
  • Provides flexibility in planning;
  • Extremely difficult to contest.

3. The Cost of Probate

Remember, if you do not have any plan in place, the state has one for you and the laws determine the distribution of your property. But if you do or do not have a Last Will, but do not have a properly funded trust, and the value of your assets is $150,000 ($100,000 without real estate) or greater, then the estate is forced to go through the probate process. Probate is the court administered process of distributing someone’s assets upon their passing and is extremely expensive and timely. An attorney has to prepare several documents and gather a lot of information prior to going to court to ‘open’ an estate. Upon opening an estate in the probate court on the first court appearance in Cook County, the court clerk will schedule the next court date fourteen (14) months out, meaning that the court does not expect the possibility of the estate being closed for more than a year. On average, a Cook County probate matter takes 2-3 years to complete. Further, estimates on fees range 6% to 8% of the gross value of the estate going toward court costs and attorney fees. Aside from all of that, the mental toll that probate takes on loved ones can only be known after having gone through it. Probate avoidance is highly recommended in most cases.

Estate Taxes. At present, $3.5 million dollars per individual can be passed down upon death without any estate tax implications. However, that number is changing from year to year, as Congress dabbles in the estate planning and tax arena. So while very few individuals are subject to estate taxes, that does not mean that the possibility should not be planned for. Estate taxes and estate tax rates are an extremely complicated area of tax law. The IRS determines value – not necessarily the individual, leading to a multitude of problems better off avoided.

Privacy. While many individuals may not look at privacy as a financial issue, I believe the significance of keeping your assets concealed from the general public must not be underestimated. As an example, it was not very long ago that Last Wills were typewritten and social security numbers were included. Upon death, a Last Will must be filed with the county. With the advancement of the technology era and identity theft, a Last Will that is filed with the county becomes a public record and an advertisement of sorts, offering a social security number to any takers. Though the holder of that social security number may be deceased, the problems that arise from identity theft may still have to be dealt with by relatives and heirs. Further, and even more likely – when a will is filed, the document becomes public and ‘everybody knows what you have.’ The potential for theft of the contents of a home is much greater if the thief knows that nobody is living there.

Understand that some of the listed issues are not issues that arise in every situation and circumstance. Property and assets can pass freely between spouses. The problem arises when property passes ‘downward’ – to someone other than a spouse. But for married couples, that does not mean estate planning should wait until after the passing of the first spouse – there are a number of potential tax benefits that a married couple can take advantage of if the planning is properly done while they are both living.

In your situation, a trust would be appropriate for the reasons listed above. While a trust would be the ‘meat’ of your estate plan, there are several other documents that are very important: power of attorney for health care, power of attorney for property, and a living will are examples. I will explain all these documents to you in detail if you wish to proceed.

I have previously forwarded you an informational packet that I use to assist me in determining the best possible setup for your plan. If you wish, please fill out to the best of your ability and return. As always, do not hesitate to call with questions.