Wills & Trusts

A will is a legal document that spells out how a person wishes to have his or her assets be distributed and how certain things to be handled after death.

Without a will, a person's assets will be distributed according to the state laws of intestacy succession, which usually require the succession of that person's assets be done in the following order: to his/her surviving spouse, to his/her children if the deceased has no surviving spouse, to that person's parents, siblings, and extended family members, if he/she has no surviving spouse and no child.  If the person has no will and no family member, his/her assets will be taken by the state.

After the person passed away, his/her assets, including bank accounts, will freeze until the court reviews the will for validity through a relatively expensive and time-consuming judicial process called probate and until the judge orders the assets to be distribute.  Once ordered, usually all assets will be distributed according to the will.  A will becomes public record once it is filed for probate, which means anyone can search for it and see its contents.

While there are many will templates you can either purchase or download free from some websites, it can be highly risky to DIY your will.  A will has to be properly drafted and executed in order to be valid.  Fail to do so in full compliance with legal requirements could risk being challenged or being deemed to be unenforceable or invalid.  Let us help you prepare this important document so you can have a peace of mind. 

Trusts are legal arrangements that provide for the transfer of assets (which can include real property, bank accounts, personal property, and intangible property) from the owner of those assets to a trustee who will then hold and manage the assets until they can be passed down to one or more designated persons by the person who manage the trust according to terms of the trust document.

Basically, there are two categories of trusts: "living trust" (i.e. a trust created during a person's lifetime) and "testamentary trust" (a trust that is created after a person's death according to that person's will).  A living trust can  be further divided into two types, "revocable trust" and "irrevocable trust". 

While wills and trusts are both estate-planning tools, many people in the U.S., not only the riches, prefer to set up trusts for reasons such as, to protect their assets and their loved ones, to avoid probate, and to reduce estate tax.

In terms of probate, when a person died with a will, his/her assets can't be distributed to the heirs until a court order is issued after an often length and costly legal process called "probate".   However, with a trust, no probate would be needed.

In terms of asset and family protection, with a will, the executor will distribute the assets of the deceased all at ones to the heir(s) following the court order regardless how such assets would then be spent by the heir(s).  Whereas, with a trust, the asset owner not only can designate to whom and when can the assets in the trust be distributed, but also, can set forth conditions which must be met before certain assets in the trust can be distributed, including such as, taking care a beneficiary's special needs and preventing wasteful spending of trust assets.

In terms of tax, in 2022, every U.S. taxpayer (i.e. U.S. citizen and green card holder) has a lifetime gift and estate tax exemption of $12.06 million dollars.  It means, if a U.S. citizen or a green card holder passes away in 2022, any of his/her assets  exceeds the $12.06 million tax exemption would be subject to 18%-40% federal tax, in addition to any applicable state estate tax.  While $12.06 million seems to be a large figure, the lifetime exemption will drop to approximately $6.2 million by the end of 2025, unless there is any change on the tax laws.  Consequently, if a person died in 2025 or after with a will and his/her assets are more than $6.2 million, the portion beyond that $6.2million tax exemption will be taxed 18%-40% by the federal government.  As for person who is neither a U.S. citizen nor a green card holder, he/she would only have $60,000 exemption, instead of $12.06 million or $6.2 million.  Therefore, if that person has more than $60000 assets in the U.S. when he/she dies, the U.S. will impose a 40% estate tax rate on the portion exceed the $60000 exemption.  However, with a trust and proper planning, such estate tax can be reduced or avoided.  

Understanding Revocable Trusts

Revocable trusts (also known as "revocable living trusts") allow those who create it (known as "Grantor" , "Trustor", or "Settlor") to manage and control their assets during their lifetime and have those be assets passed to their loved ones when they die without probate.  While alive, the grantor may change the terms of the revocable trust or even revoke the trust.  Once the grantor passes away, a revocable trust becomes irrevocable and the assets in the trust would be distributed to beneficiaries by the person or entity appointed by the grantor ("Trustee") according to the terms of the trust.  A grantor can also be the trustee for revocable trusts.

At PAI LAW OFFICES, P.C., we help you to make essential decisions about your assets and to plan ahead as to how your assets shall be distributed.  Contact us for an initial consultation to learn more about whether you shall set up a revocable trust and how to create a revocable trust to suit your needs.

What CAN be Transferred Into a Revocable Trust?

• Real property (e.g., homes, farms, vacation homes, land)

• Cash accounts (e.g. savings, checkings, CDs)

• Business interests

• Personal property (e.g. artwork, antiques, jewelry, collectables, books, firearms, pets, tools, clothes)

• Life insurance policies

• Non-qualified annuities (by retitlng them into the name of the trust or designate the trust as the primary or secondary beneficiary)

• Investments (e.g., stocks, bonds, mutual funds, money market accounts, non-retirement investment accounts, brokerage accounts) Note: stocks /bonds must be held in certificate form and must have shares for 2% of their current value

What CAN NOT be Transferred Into a Revocable Trust?

• Retirement investment accounts (e.g. 401K)

• IRAs

• Annuities

• Health savings accounts (HSAs)

• Cash

• Assets located overseas

• Vehicles

Pros

Some of the most common advantages of using revocable trusts as an estate planning tool are:

1. Probate Avoidance: Probate is a court-supervised process where the judge reviews the will, appoints the executor or personal representative who will administer the estate and issues a court order to allow assets be distributed to the intended beneficiaries. If assets are held in a revocable trust, in Michigan and most other states, they typical do not need to go through the probate process. 

2. Flexibility: While there are other types of trusts, the revocable trust remains a popular choice due to its flexibility because the grantor is freely to make changes to the terms of the trust or terminate the trust during his or her lifetime at anytime without court involvement or other complications.  This is especially beneficial if the assets involve real properties.  For example, at the time of creating the trust, a grantor wish to give a house to Y.  However, if the grantor then changed his mind and now wants to give that house to Z instead, the grantor only needs to have the terms of the trust relating to the ownership of the house be modified to enable Z to own the house.  Thus, no cost and tax relating to real estate transaction would arise.

3. Privacy: In the case of a will, assets typically can be viewed by the public as they are being administered through the probate process.  By contrast, assets placed in a trust are administered to beneficiaries privately and would not be disclosed to the public because they do not to go through probate.

4. Incapacity Protection: A trust provides protection.  If the grantor and the trustee are same person and if he/she later becomes incapacitated (e.g. develops dementia), a new or successor trustee can take over the management of the trust. 

Cons 

The followings are common disadvantages to revocable trusts, which must be weighed against the advantages and your specific needs.

1.  Lack of Asset Protection: Unlike irrevocable trusts, revocable trusts generally do not shield assets from the reach of creditors and judgments.

2. Time and Cost: The time and cost for going through the process of setting up and funding a revocable trust usually takes much more time and involve higher cost than simply preparing a will.  For, other than preparing the legal documents to set up the trust, assets needs to be transferred into the trust by changing deeds, titles, and other documents so the trust would be funded.  Even so, it is worth to note that the time and money spent on setting up a revocable trust would still be much less than those to be spent on probate and will execution.  In the event grantor decides to terminate the revocable trust, the grantor needs to sign a trust revocation document and "defund” the trust by removing the assets out from the trust. 

3. Tax: In a revocable trust, the owner of the assets in the trust (i.e. the grantor or the grantor's representative) must file tax return to report the trust's income, deductions, and credits. Any income generated from the revocable (living) trust (e.g. interest, rent...) would be taxable to the trust creator during his/her lifetime.