Many investors don’t even know how crucial it is to have an estate plan. While planning for the unexpected is uncomfortable at times, it is essential for all of us. Yet the real estate investor has even more reason to be vigilant about estate planning. Whether you own a single investment property or an impressive and costly portfolio, surely you want your real estate assets to be passed onto your loved ones and chosen heirs.
Today we will focus on some common FAQs about two of the most well-known estate planning documents: wills and living trusts. Read on to learn about what these legal documents have in common, what they do differently, and what these tools really look like in action.
If you don’t pick out your heirs, the U.S. government is all too happy to hang on to your hard-earned assets and find a use of their choosing for your valuables. Even investors with no family can likely think of a cause closer to their heart than Uncle Sam. Still, brilliant people with legal access die without estate plans often. Why? We have a pretty good working theory.
Death isn’t fun to acknowledge or look at, let alone admit will happen to us. But we can’t change its inevitability. That part is beyond our control. So, we turn our focus to what we can control. What we can do is take control of our legacy today and ensure our desires will be carried out no matter what.
The benefits of estate planning include giving you power now, while you are alive. Planning gives you the peace of mind of knowing that even if misfortune strikes, your business will live on and your chosen heirs will be taken care of. It takes some of the fear, and the sense of “forever,” out of death.
Let’s start at the very beginning. For our purposes, that means making sure we are clear on what these estate planning tools are and what they do.
There are many different types of wills. We raise the issue to make the point that when most people think of a will, they are usually referring to the most common and easiest type of will for the average person to draft, a variation on the Simple Will. The requirements for and components of these wills are straightforward:
Wills aren’t bad, but they can cause problems when relied upon alone. These criteria may seem basic, but every single one can go awry. Even the first can be challenged after your death. So, let’s look at the living trust to see what it has to offer.
Living trusts are established by private trust agreements. This type of revocable trust is one you can form today, but deed property titles into for years to come. In this sense, it’s also an asset protection tool. Living trusts also allow you to name a trusted confidant to manage your real estate assets if you ever can’t while alive, say because of a medical emergency. Perhaps most importantly, because this tool avoids probate, your heirs will receive their share far faster with no surprise fees.
Essentially, each of these options gives you a legal way to direct where specific assets go upon passing. Both also allow for the possibility of naming a guardian for minor children. A will has this option, while a living trust would need to be set up properly (in conjunction with a pour-over will) to achieve this goal.
The similarities end there, however. Let’s take a look at the crucial differences between these tools before exploring which option is best for the real estate investor.
There are many crucial distinctions between the living trust and the will. The differences touch on everything from legal and business differences to the costs you can expect to pay for your estate plan.
Wills must be probated, while living trusts bypass this process. The living trust offers greater anonymity for real estate investors, even after their passing. Your heirs will also benefit from this privacy. Probate court records are public, while trust filings are private. The probate court would never be involved in handling matters pertaining to your trust. Where a will names an executor, a living trust names a successor trustee. While both are involved in administering the estate, your trustee’s actions aren’t in the probate court’s purview.
Wills may be cheaper upfront, but you get what you pay for. The money you “save” could lead to more costly heartache for your heirs, particularly if you truly cheap out and write it yourself. Resist that urge. True, living trusts are more expensive to establish, but you’ll be far more protected. They can’t be contested or held up in probate court for months, even years--a fate all too normal for those who die with only a “Last Will and Testament.” Your heirs won’t have to worry about paying out lawyers and accountants or fighting for their fair share if your living trust leaves no room for ambiguity. This is just one more reason to get professional help for your estate plan.
Because of the additional benefits conferred by the living trust, we often recommend that our real estate investor clients use this tool instead of a traditional will alone. While we’ve hit on the basic features, an example may help illustrate the differences in real life.
Amy and Caroline are 36-year-old identical twin real estate investors. The twins got started investing together, even splitting profits and losses. They grew their businesses, yet happened to always have the same number of assets, each with the same value.
But Amy and Caroline didn’t do everything exactly the same. Although their financial conditions and portfolios were dead ringers just like the sisters, the women disagreed about how to handle estate planning. The two made their appointments to address the issue the same day. Each sister had five chosen beneficiaries, but neither included the other.
Amy read online that the will is the oldest and most accepted document available, and partially to save money, she used a consultation with a lawyer to draft a will. She spent some time googling a cheap attorney, and found one who agreed to create a document that listed her existing assets. The price was right and she felt secure. “I’m young,” Amy reasoned: “I’ll update it later.”
Caroline, however, is more cautious. She spent more time researching her options and learned about living trusts and estate planning for real estate investors. She spent some time looking for references for an estate planning attorney with real estate experience, narrowed down her candidates, and opted for an attorney who was also an investor. This lawyer spent some time with Caroline looking at her full situation and providing thoughtful feedback. He agreed to form her living trust and advised that she use a pour-over will, a tool which ensured all of her assets would be added to the living trust. She spent more upfront than her sister, but also would not need to come back to update a will (and pay the necessary legal fees) like her sister would. Caroline also took advantage of the lawyer’s estate planning review services, which meant her lawyer ensured compliance and made suggestions twice annually.
Now let’s see what would happen for our sisters if they were to pass away suddenly. No actual twins were harmed in the making of this example.
Five years after drafting her will, Amy has essentially forgotten about the document. During those years she got married, had two children, acquired three new investment properties, and got busy with life. She is driving to work on an uneventful morning. Out of nowhere, her small sedan is T-boned by an 18-wheeler. She passes away immediately upon impact. Amy’s five-year-old will is her only estate planning document.
First, her will would have to be probated no matter what. Things get darker, though. She listed beneficiaries before her marriage and kids existed, and while there are legal ways to sort these things out, they are expensive and time-consuming processes for her already-grieving family to handle. Further, not all of her assets are accounted for in that will. The investments she had purchased since weren’t listed because the will wasn’t updated, creating yet another issue for the court. Sorting out these details usually means legal and accounting fees are deducted from the estate while the heirs, both listed and presumed, wait. Sometimes they fight. Amy’s family would be in a much better position if she had followed her sister’s lead.
Suppose Caroline also started a family and grew her portfolio in the five years since making her plan. Now let’s suppose she’s fatally struck by lightning. Her heirs won’t be attending probate court like Amy’s, because she used the power combination of a pour-over will, living trust, and closely involved attorney. Her family was included in her trust agreement, and even though her last investment hadn’t been formally listed in her documents before she passed on, the pour-over will ensure all assets went into her living trust for distribution.
While a living trust clearly beats a will alone, the pour-over will combined with a living trust is the gold standard for the vast majority of our clients. The pour-over will is superior to the simpler will solution mentioned above because it accounts for all assets you control at the time of your death. Any you hadn’t added are “poured” into your living trust, offering a smooth business transition option that also takes care of your heirs.
To learn more, check out our article, What Is The Difference Between A Will And A Trust?
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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