The Key Differences Between Wills and Trusts

In speaking with clients, friends and family, I realize that many have a misunderstanding of the differences between wills and trusts.

When discussing estate planning, a will is what most people think of first. Indeed, wills have been the most popular method for passing on assets to heirs for hundreds of years. But wills aren’t your only option. And if you rely on a will alone to pass on what matters, you’re guaranteeing your family has to go to court when you die.

In contrast, other estate planning vehicles, such as trusts, which used to be available only to the uber wealthy, are now being used by those of all income levels and asset values to keep their loved ones out of the court process.

But determining whether a will or a trust is best for you depends entirely on your personal circumstances. And the fact that estate planning has changed so much makes choosing the right tool for the job even more complex.

The best way for you to determine the truly right solution for your family is to meet with us as your Personal Family Lawyer® for a Family Wealth Planning Session. During that process, we’ll take you through an analysis of your personal assets, what’s most important to you, and what will happen for your loved ones when you become incapacitated or die. From there, you can make the right choice for the people you love.

In the meantime, here are some key distinctions between wills and trusts you should be aware of.

When they take effect
A will only goes into effect when you die, while a trust takes effect as soon as it’s signed and your assets are transferred into the name of the trust. To this end, a will directs who will receive your property at your death.

A trust specifies how your property will be distributed before your death, at your death, or at a specified time after death. This is what keeps your family out of court in the event of your incapacity or death.

Because a will only goes into effect when you die, it offers no protection if you become incapacitated and are no longer able to make decisions about your financial and healthcare needs. If you do become incapacitated, your family will have to petition the court to appoint a conservator or guardian to handle your affairs, which can be costly, time consuming, and stressful.

With a trust, however, you can include provisions that appoint someone of your choosing—not the court’s—to handle your medical and financial decisions if you’re unable to. This keeps your family out of court, which can be particularly vital during emergencies, when decisions need to be made quickly.

The property they cover

A will covers any property solely owned in your name. A will does not cover property co-owned by you with others listed as joint tenants, nor does your will cover assets that pass directly to a beneficiary by contract, such as life insurance.

Trusts, on the other hand, cover property that has been transferred, or “funded,” to the trust or where the trust is the named beneficiary of an account or policy. That said, if an asset hasn’t been properly funded to the trust, it won’t be covered, so it’s critical to work an attorney to ensure that your assets are titled properly.

Unfortunately, many lawyers and law firms set up trusts, but don’t then ensure your assets are properly re-titled or beneficiary designated, and the trust doesn’t work when your family needs it. I have systems in place to ensure that transferring assets to your trust and making sure they are properly owned at the time of your incapacity or death happens with ease and convenience.

How they’re administered

In order for assets in a will to be transferred to a beneficiary, the will must pass through the court process called probate. The court oversees the will’s administration in probate, ensuring your property is distributed according to your wishes, with automatic supervision to handle any disputes.

Because probate is a public proceeding, your will becomes part of the public record upon your death, allowing everyone to see the contents of your estate, who your beneficiaries are, and what they’ll receive.

Unlike wills, trusts don’t require your family to go through probate, which can save both time and money. And since the trust doesn’t pass through court, all of its contents remain private.

How much they cost

Wills and trusts do differ in cost—not only when they’re created, but also when they’re used. The average will-based plan can run between $500-$2000, depending on the options selected.  An average trust-based plan can be set up for $3,000-$6,000, again depending on the options chosen. So at least on the front end, wills are far less expensive than trusts.

However, wills must go through probate, where attorney fees and court costs can be quite hefty, especially if the will is contested. Given this, the total cost of executing the will through probate can run as high as $8,000-$10,000 or more.

Even though a trust may cost more upfront to create than a will, the total costs once probate is factored in can actually make a trust the less expensive option in the long run.

During a Family Wealth Planning Session at my firm, I will help you compare the costs of will-based planning and trust-based planning with you, so you know exactly what you want and why, as well as the total costs and benefits over the long-term.

Using proprietary systems, such as our Family Wealth Inventory and Assessment and Family Wealth Planning Session, we’ll carefully analyze your assets—both tangible and intangible—to help you come up with an estate planning solution that offers maximum protection for your family’s particular situation and budget. Contact me today to get started.

Even if Your Life Insurance Policy isn’t as Big as Paul Walker’s ($50 million), You Can Still Protect the Proceeds of Your Policy from Taxation Like an “A” List Celebrity

Hollywood actor Paul Walker was involved in a horrific car accident on November 30, 2013. The actor crashed while a passenger in a Porsche traveling more than 100 mph and died at the scene. Walker was in the middle of filming for FURIOUS 7 at the time of his death and Universal Studios collected $50 million for his untimely passing. Sure it wasn’t a typical life insurance policy - it was movie insurance - and it wasn’t Walker’s policy but in fact Universal’s. But it did insure the studio against his untimely death. Disney is reportedly working on a $50-67 million claim on Carrie Fisher for a three-movie Star Wars contract they had with her when she passed away.

The payout on your life insurance may not be a big as Universal’s or Disney’s, but if you have been responsible enough to purchase a life insurance policy as added protection for your loved ones, you will want to carry that responsible action a little further by protecting that important payout from taxation.

More on how this can be accomplished after these other large celebrity insurance payouts:

Michael Jackson = $3 million and an out of court settlement on a $17.5 million policy)

Heath Ledger = Family settled out of court on a $10 million policy he bought shortly before his death

Dale Earnhardt = Out of court settlement on a 3.7 million claim

Here is the taxation problem with life insurance proceeds. If you are married and have named your spouse as the beneficiary of your life insurance policy, those proceeds will pass free of both income taxes and estate taxes.  However, if your children are named as beneficiaries, the proceeds are free of income tax, but they do become part of your taxable estate.  Estate taxes above the exemption threshold have ranged from 35% up to 55% in recent years, so that’s a big bite.

An Irrevocable Life Insurance Trust (ILIT) is a great asset protection tool that protects your life insurance from estate taxes, and when drafted properly, can also be used to protect proceeds from creditors, bankruptcy and divorce. 

The best way to use an ILIT is to have the Trustee of the life insurance trust purchase the life insurance directly and pay all premiums. If you already own the life insurance, your ILIT Trustee can either buy the policy for you, or you can transfer it in, by following certain rules we can help you with.

So why is this a good idea? The proceeds from the life insurance are not part of your estate if the ILIT owns the life insurance.  Therefore, they are not subject to estate tax upon your death. 

If you have not yet purchased life insurance, you should create your ILIT first.  Have your ILIT purchase the life insurance.  This will circumvent the transfer of life insurance from you to
another party, thus avoiding any difficulties if you do unexpectedly pass away since the proceeds of your life insurance policy would revert to your estate if you died within three years of the transfer.

The ILIT is a phenomenal tool for protecting your life insurance from taxation, leaving behind more for your loved ones.

Contact my firm today to take advantage of this type of planning in your own estate.

Don’t Forget to Include Your Digital Assets in Your Estate Plan - Part Two

In the first part of this series, we discussed the importance of including your digital assets in your estate plan. Here, we’ll talk about the best ways to get started with this process. Click this link to see the first part in the series.

Today, estate planning encompasses not just tangible property like finances and real estate, but also digital assets like cryptocurrency, blogs, and social media. With so much of our lives now lived online, it’s vital you put the proper estate planning provisions in place to ensure your digital assets are effectively protected and passed on in the event of your incapacity or death.

However, because many types of online assets have only been in existence for a handful of years, there are very few laws governing how they should be dealt with through estate planning. And due to their virtual and often anonymous nature, just locating and accessing some of these assets can be extremely difficult for those you leave behind.

 Given these unique challenges, last week we discussed some of the most common types of digital assets and the legal landscape surrounding them. Here, we offer some practical tips to ensure all of your digital property is effectively incorporated into your estate plan. 

Best practices for including digital assets in your estate plan
If you’re like most people, you probably own numerous digital assets, some of which likely have significant monetary and/or sentimental value. Other types of online property may have no value for anyone other than yourself or be something you’d prefer your family and friends not access or inherit.

To ensure all of your digital assets are accounted for, managed, and passed on in exactly the way you want, you should take the following steps:

1. Create an inventory: Start by creating a list of all your digital assets, including the related login information and passwords. Password management apps such as LastPass can help simplify this effort. From there, store the list in a secure location, and provide detailed instructions to your fiduciary about how to access it and get into the accounts. Just like money you’ve hidden in a safe, if no one knows where it is or how to unlock it, these assets will likely be lost forever.

2. Back up assets stored in the cloud: If any of your digital assets are stored in the cloud, back them up to a computer and/or other physical storage device on a regular basis, so fiduciaries and family members can access them with fewer obstacles. That said, don’t forget to also include the location and login info of these cloud-based assets in case you don’t have a chance—or forget—to back them all up.

3. Add your digital assets to your estate plan: Include specific instructions in your will, trust, and/or other estate planning documents about the heir(s) you want to inherit each asset, along with how you’d like the accounts managed in the future, if that’s an option. Some assets might be of no value to your family or be something you don’t want them to access, so you should specify that those accounts and files be closed and/or deleted by your fiduciary.

Do NOT provide the specific account info, logins, or passwords in your estate planning documents, which can be easily read by others. This is especially true for wills, which become public record upon your death. Keep this information stored in a secure place, and let your fiduciary know how to find and use it. Consider a service such as Directive Communication Systems to support you here.

It’s also a good idea to include terms in your estate plan allowing your fiduciary to hire an IT consultant if necessary. This will help him or her manage and troubleshoot any technical challenges that come up, particularly with highly complex and/or encrypted assets.

4. Limit access: In your plan, you should also include instructions for your fiduciary about what level of access you want him or her to have. For example, do you want your executor to be able to read all of your emails and social media posts before deleting them or passing them on to your heirs? If there are any assets you want to limit access to, we can help you include the necessary terms in your plan to ensure your privacy is honored.

5. Include relevant hardware: Don’t forget that your estate plan should also include provisions for any physical devices—smartphones, computers, tablets, flash drives—on which the digital assets are stored. Having quick access to this equipment will make it much easier for your fiduciary to access, manage, and transfer the online assets. Since the data can be wiped clean, you can even leave these devices to someone other than the person who inherits the digital property stored on it.

6. Check service providers’ access-authorization tools: Carefully review the terms and conditions for your online accounts. Some service providers like Google, Facebook, and Instagram have tools in place that allow you to easily designate access to others in the event of your death. If such a function is offered, use it to document who you want to have access to these accounts.

Just make certain the people you named to inherit your digital assets using the providers’ access-authorization tools match those you’ve named in your estate plan. If not, the provider will probably give priority access to the person named with its tool, not your estate plan.

Truly comprehensive estate planning

With technology rapidly evolving, it’s critical that your estate planning strategies evolve at the same time to adapt to this changing environment. With us as your Personal Family Lawyer®, we can help you update your plan to include not only your physical wealth and property, but all of your digital assets, too.

We know how valuable online property can be, and unlike many lawyers, we have the experience and skills to ensure these assets are preserved and passed on seamlessly. Moreover, we can do this while respecting and protecting your privacy rights. Contact my firm today to get started. 

Did A Cryptocurrency Multi-Millionaire Make A Monumental But Common Estate Planning Mistake or Did He Actually Fake His Own Death?

The recent death of Gerald Cotten, the 30 year old CEO of a major cryptocurrency exchange in Canada, is raising a lot of questions. Cotten died with the only password to a digital vault storing roughly $144,000,000 worth of his clients’ cryptocurrency.

At the time of his death, most of the exchange’s holdings were stored in a digital vault know as a “cold wallet” because it is not actually connected to the internet. This makes it much more secure from the threat of an outside hacking.

However, without the password to this wallet, the exchange is now faced with attempting to break through Cotten’s ironclad security measures. Its IT experts have so far been unsuccessful - leaving the trove of digital coins unreachable by their 115,000 rightful owners and the exchange to file for bankruptcy in January of 2019.

Suspicious Circumstances?

In cryptocurrency’s short lifespan there have been several high profile cases where exchanges have been “hacked” and millions worth of digital currency have been “lost.” Many insiders don’t buy the official stories and wonder if the exchanges themselves are actually involved in the disappearances of the coins.

Cotten’s case is different in the sense that he has supposedly died, but Canadian financial authorities and independent auditors are nonetheless currently investigating the case. Some concerning facts surrounding the incident have been made available to the public.

According to an affidavit filed in a Canadian court Cotten died suddenly of complications related to Crohn’s disease while traveling in India.

The sudden death of the Gerald Cotten, the 30-year-old Nova Scotian CEO of cryptocurrency exchange QuadrigaCX has left people struggling to recover about $144 million worth of cryptocurrency from his laptop.

The fact that he suddenly passed away in India of all places immediately drew concern. Skeptics pointed to the fact that the host of a National Geographic show called Scam City was able to purchase a legal death certificate in India for only $450 USD in 2012.

Likewise, Cotten’s widow moved the couple’s Nova Scotia properties into a trust immediately following his death, leading to further speculation. She happens to be a person that has been known by three different names in her lifetime.

Lastly, Cotten’s estate planning in itself would suggest further investigation is warranted given the surrounding circumstances. Cotten signed his will on November 27, 2018 - less than two weeks before he died. His planning was comprehensive and left his wife, as executor, instructions for the complete distribution of his assets - including $100,000 for the care of his two dogs. The crypto community points out that while he apparently had the uncanny intuition to engage in comprehensive estate planning days before his untimely and sudden death, he managed to forget to include the one piece of information that would unlock his company’s vast crypto assets should he ever pass away.

Common Problem

Whether the loss of the exchange’s assets turns out to be a simple case of carelessness or something more malicious, the lesson remains the same:

From cryptocurrency to safety deposit boxes and everything in between, your family must know how to find and access every asset you own. Otherwise it could be lost forever.

There is a total of more than $58 billion of unclaimed assets from across the country held by the State Department of Unclaimed Property. Much of that massive sum got there because someone died and their family didn’t know they owned the asset.

Given this, if you own any digital currency like Bitcoin, be sure to call me to make certain these assets have been correctly included in your estate plan. Indeed, if you have any assets that might potentially be overlooked in the event of your incapacity or death, contact me now.