MANKATO, Minn. (10/22/2013) -- Personal estate planning is a critical part of life, especially when transferring a farm business to the next generation. However, recent survey data from four states shows that over 69 percent of farm family members do not have an up-to-date personal estate plan. Part of the reason is confusion around the differences between a Will and a revocable living trust.
A Will and a revocable living trust are instruments that will direct your assets to the individuals, a business entity, organizations, or charities upon your death. You do not need both. One or the other will suffice. The choice of which instrument to use should be based upon your estate planning goals. Each instrument has specific traits.
A Will triggers the probate process. The parameters vary by state but in Minnesota, probate occurs when the decedent owns $50,000 or more of assets or any real estate. Probate is a court supervised process. In Minnesota it takes 12-18 months on average to complete. Court and attorney fees cost, on average, 2-3 percent of the estate value. The process is also open to the public in that anyone can obtain a copy of the decedent's probate records by requesting copies from the decedent's county of residence. These records list the decedent's assets and their value on the date of death. Within the Will, an individual can list how they want their assets distributed upon their death. They can also list a guardian and conservator if they have minor children. Upon death, the decedent's assets receive an increase in basis to fair market value. A Will does not allow for protection of assets from lawsuits and other adverse actions nor does it allow an individual to do disability planning.
Assets in a revocable living trust do not go through the probate process and therefore are closed to the public. The trust must go through an administrative phase to distribute assets but this process takes much less time and generally costs much less than probate. Think of a revocable living trust as a bucket. You place all your farm and non-farm assets into this bucket. You still own the assets so you can add assets to the trust or take assets out and sell or trade them. There is no change in your tax status. Upon your death, the assets receive an increase in basis and pass to your heirs as directed in the trust document. A revocable living trust also allows you to pass assets to an heir via a "protected trust" which shelters the assets from lawsuits and other adverse actions. The trust also enables an individual to do disability planning, a process whereby you outline how you want to be cared for in the event of a disability or incapacitation. A key step in establishing a trust is "funding" the trust. That is, titling all assets with a title into the name of the trust. If this is not done, the assets are required to pass through the probate process. The revocable living trust can allow for much more flexibility in your personal estate planning than does a Will.
In addition to a Will or revocable living trust there are three additional documents required to complete the estate planning process. The first is durable power-of-attorney. Durable means the power continues if you become disabled and cannot make your own decisions. Second is the health care directive where you list how you want to be cared for if you become disabled or death is eminent. Third is listing your Health Insurance Portability and Accountability Act (HIPAA) authorized individuals. These are people you grant access to your medical records and documents. If you are unable to convey your own medical information, the medical care facility will not share this information with anyone unless you have granted them HIPAA authority.
Personal estate planning is an important process. Whether you chose a Will or a trust is less important than getting the process done correctly. Laws are changing constantly so seek qualified legal assistance when completing and implementing your personal estate plan.