Estate Planning the Right Way

by John N. Vaughan

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A recent survey shows that 55 percent of Americans have done no formal estate planning and do not even have a simple will. That number is unchanged from a similar study 3 years prior. Only one in three African-Americans has prepared a will, and only one in four Hispanics has a will. More than half of white adults have done some will planning.

Ten percent of those who do not have any estate planning in place say it is because they do not want to think about dying or becoming incapacitated. An equal portion say they do not know who to talk to about estate planning. One in four respondents say they do not think they have enough assets to need a will. These may not sound like worthwhile reasons for avoiding planning, but they are the excuses people in your church use to put off this important process.

Probate: Friend or Foe?

Virtually every American has some form of property under his control when he dies. In the estate-planning world, a common saying is that if you are not planning the distribution of your estate, your state legislature has already planned it for you. That property-distribution system created by state law, called the probate process, has earned a bad reputation. In many cases that reputation is justified. The word probate describes the statutory and court system created in each state to deal with property that has no clear owner due to death or incapacity of the individual whose name is on the title or deed. In the American legal system, all property belongs to someone; and, if the person who owns property suddenly no longer holds that property due to death or disability, the probate system comes into play.

Due to its dependence on the courts, probate systems work at a pace slower than most heirs prefer. The length of a simple probate proceeding can be anywhere from 6 months to a year and a half or longer. Most probate statutes require a mandatory waiting period during which creditors have an opportunity to make a claim against the estate. Working within the probate process requires a level of technicality and legal understanding most people prefer to avoid; and, in so doing, the process can become expensive due to attorney fees, court costs, and other costs. In addition, because probate is part of the court system, all records and most proceedings are public. When it comes to dealing with assets and distribution to heirs, many people would prefer to keep those matters private. These factors make probate a thing most people want to avoid.

Avoiding Probate Simply, but Carefully

Due to the challenges of probate, many people attempt to avoid the probate process as much as possible, if not entirely. While people should always implement a Last Will and Testament first as a catchall in the event plans do not work right, some people use beneficiary designations and joint ownership of property to transfer title of property to others automatically upon their death. These methods can work, but they have limitations.

One of the easiest ways to avoid assets passing through probate is to take advantage of beneficiary designations, pay-on-death clauses, and transfer-on-death devices. These three methods transfer assets without the need for a probate court to retitle the assets. Beneficiary designations and pay-on-death clauses transfer ownership of assets upon the death of the owner of financial accounts, such as bank accounts, investment accounts, certificates of deposits, and life insurance policies. The account owner must make this designation in writing during his life using the paperwork and process required by each financial institution.

Transfer-on-death typically refers to the titling of more tangible assets, such as vehicles, boats, and sometimes real estate. State law governs the setup of a transfer-on-death designation. Using a transfer-on-death designation, often called a TOD, the owner of an asset can make a formal designation on the title of a vehicle or other state-titled asset that legally directs that asset to another person upon the death of the owner.

Twelve states — Arizona, Arkansas, Colorado, Kansas, Missouri, Minnesota, Montana, Nevada, New Mexico, Ohio, Oklahoma, and Wisconsin — have statutes that allow a property owner to transfer real estate through transfer-on-death designation within the language of the deed to the property. Called a beneficiary deed or a transfer-on-death deed, the owner of the real estate can create a deed that retains ownership in his name for life, but upon death transfers the real estate to another party without the necessity of probate intervention. Since real estate is one of the main assets that slows down a probate proceeding, the ability to transfer real estate on death outside probate is invaluable in states that allow it.

Many people use joint ownership as a means to transfer property outside the probate process. Naming a spouse or other individual as joint tenant with right of survivorship operates under law to transfer the ownership of the asset completely to the surviving owner or owners upon the death of one. This method can have unintended consequences, though. While jointly owned property avoids probate, adding someone to the title of your property as a joint owner makes that asset available to the creditors of the other party in the event of a judgment. In addition, if a joint owner files for bankruptcy, his joint interest will become part of the bankruptcy estate. In the same way, if a joint owner ends up in a divorce proceeding, the court will include his joint interest in that individual’s assets for purposes of property division in the divorce. Last, federal tax law deems property named in joint owner as a gift, so placing the name of a joint owner on property can have gift-tax implications. Due to these reasons, one must be very careful when using joint ownership as a probate avoidance mechanism.

Why Create a Will?

In the estate planning mindset, a simple Last Will and Testament is a basic building block every adult needs. Although a Last Will and Testament still functions within the probate process, a Last Will and Testament allows you to create your personal directions for management and distribution of the property you leave behind, trumping the directions given under the impersonal statute-driven process. Another advantage of a Last Will and Testament for parents of minor children is that a couple can designate their preference for who takes custody of their children if they both die, also allowing for creation of trusts for those minors to handle the funds through childhood years and even into college and adulthood. In addition, a Last Will and Testament allows for the creation of charitable gifts where the probate statutes allow no such room.

Wills are curious creatures. On one hand, they are valuable in that they are the first step toward creating a cohesive plan for distributing your property after you die instead of abiding by the legislature’s distribution plan. On the other hand, many people do not realize that a will and the assets governed by it must still pass through the probate system to take effect. That is both good news and bad news.

The probate statutes create an established process to prove that your will is your actual intent and then guiding the process to make sure everything is distributed in a manner according to your wishes. On the downside, though, negative elements of the probate process — slow speed, complexity, cost, and no privacy — still have an impact on your estate.

Despite the downside, a simple Last Will and Testament is a must for every adult to override the state probate distribution process. Those who think they do not own enough assets to need a Last Will and Testament are often not taking stock of what they own. Many times when people inventory their assets, they are shocked at the value of their estate. A Last Will and Testament is a safety net that can direct those assets for them in the event something happens. Most local attorneys can draft a simple Last Will and Testament at an affordable rate, many times in the range of $500 to $750.

Can a Trust Help?

Another probate-avoidance mechanism is a trust, which can come in many forms. A trust in its simplest terms is a holding tank for assets that has a legal name for titling purposes. By taking the assets out of the name of an individual and retitling them in the name of a trust, you neutralize the need for probate of the assets in the trust’s name after you die because that property no longer has a human owner who can die. Instead, the trust has a trustee, often the person who creates the trust and transfers assets to it, and successor trustees, all who are tasked by the language in the trust to manage and later distribute the property in some fashion. The trustee and successor trustees manage the property over time and then, when distributing the property under the terms of the trust, do the work that a probate court would do in retitling property in the name of the ultimate recipients of the assets.

We call one of the most popular forms of a trust a revocable living trust. The property owner creates it while he is living to operate and hold his assets during his life. During this time the property owner may amend or revoke the document so the trustee can handle his property on his behalf during any period of disability and avoid probate by placing the assets in the trust after he dies. For some people, a trust can make sense because they have complex assets that are difficult to transfer properly using the other nonprobate methods or because they like the idea of a trustee managing their assets during any period of disability in the future. Whether or not a trust is a good fit should be a decision based on personal preferences of how you like to hold and manage your assets as well as what types of assets you own. People can best make this decision in consultation with a legal professional who has experience working extensively with both wills and trusts.

The Pastor’s Role in Estate Planning

Pastors can have significant influence on the actions taken by church members in regard to putting a Last Will and Testament or trust in place and thinking through other estate-planning issues. Stewardship is broader than just giving tithes and offerings on Sunday. From a life-giving perspective, it includes ensuring that the property God has entrusted you with is properly distributed upon your death. A strong argument can be made that tithing on the value of your estate, not just your cash income, makes sense biblically. Creating estate-planning documents with a gift included is one of the best ways to give one last time to the Lord. Set the pace for your people by doing estate planning on your own. What you learn through the process will lead to teachable moments with your congregation.

The motivation to sit with a legal professional and work through estate-planning questions often comes in periods of transition. As a pastor, you are intimately involved in the transitional moments in the lives of your congregants. Pastors are present when children are born, when someone receives an unfortunate diagnosis, when family members die, and when crisis strikes and people wish they had been better prepared. The people in your church need not only spiritual counsel but also practical knowledge in those moments. A pastor who understands estate planning enough to prompt people in those moments to get their house in order can be influential. Even better, it is advisable for you to locate one or two legal professionals who are experienced in estate planning to whom you can direct your members when the need arises.