Integrated Estate Planning: Wills, Living Trusts, and Asset Protection
By Attorney H. Van Smith (Richmond, Virginia)
When training new staff members at our law firm, I sometimes listen in on their phone calls with new clients. Two frequently asked questions are “Does your law firm do wills?” and “How much do they cost?” Many clients are initially unaware that estate planning typically involves more than simply drafting a will.
When I was growing up, my mother used to listen to Paul Harvey, the late radio personality. Harvey always ended his broadcast with the familiar line “And now you know the rest of the story!” Everyone should have a will, but I would like to share the rest of the story—estate planning strategies that complement a will.
Years ago, in the midst of a consultation, I heard a familiar story. After the death of her mother, my client sat in our conference room and explained her situation:
I’m the eldest daughter and the executor of my mother’s estate. Your law firm came highly recommended for estate work. My parents were good savers and lived frugally, but by the end of my mother’s life, the long-term care facility and unreimbursed medical expenses had gobbled up much of their savings and retirement. The house, the car, and some funds in the bank are all that is left. Probate should be pretty straightforward.
I did not want to ruin her day, but I thought to myself, “Had her mother come to see me six or seven years ago, I could have saved her family $275,000-$320,000 or more with proper estate planning.”
The Foundation of Good Estate Planning
At a minimum, everyone should have a will. A will, simply put, enables us to legally say, “Here is my stuff, and here is who gets it when I die.” If you have minor or special needs children, additional protection and guardianship language will be included in the will.
Most folks think that estate planning is simply specifying “when I die, X.” But the foundation of good estate planning also includes providing guidance for managing your finances and health before you die. Statistically speaking, you will have many good years in retirement. However, for 52 percent of U.S. residents, there will be a period of years during which a family member or other agent manages your care and finances in part or in full.
As a result, a solid estate plan should also include a financial power of attorney, a healthcare power of attorney or advance directive, a HIPPA authorization, and memorial instructions. These documents provide a rulebook for your agent to guide their decisions while they are acting on your behalf, reducing the likelihood of innocent or intentional mishandling of your finances or care when you can no longer act for yourself.
Keep in mind the following issues that you will face with a will-based estate plan:
● Probate. This is the process of inventorying and accounting for your assets and debts when you die, in the county or city of your residence. In Virginia, as in many states, it often takes two to three years and can cost more than 3-5 percent of the total estate. If you must face probate, rely on a law firm to assist you. As our clients know, skilled attorneys can save time and money in probate.
● Compliance with state law. A will is drafted to comply with the laws and requirements of the state in which it is written. Thus, if you move to another state, you must have your will reviewed and possibly updated to ensure that it complies with the laws and requirements of the new state.
● Outright inheritance. Most wills provide for heirs to inherit money and property outright, assuming they are of appropriate age. Statistics indicate that 87 percent of adult children will deplete their inheritance within eighteen months of their parent’s death, whether by divorce, litigation, bankruptcy, business failure, debt, or extravagant spending.
We can do better. Once our clients understand the rest of the story, they experience a far better outcome.
Consider Adding a Revocable Living Trust to Your Estate Plan
Imagine that you are the conductor of your own estate planning train. The first car on the train is the will. Now, imagine adding a second car to your estate planning train—the living trust. What is a trust? What are the advantages to adding this second car to your estate plan?
A revocable living trust is simply an invisible legal bucket that holds your assets. You can put assets in and take assets out. Revocable is a legal term that means “take-it-outable.” In other words, a revocable living trust does not restrict your ability to spend your money or use your assets in the manner you did before you had the trust.
A revocable living trust provides the following key advantages:
● Avoidance of probate. By adding the second train car, the living trust, your assets held by the trust avoid the potentially lengthy and expensive court proceedings known as probate. Why? If your estate plan consists of only a will, then the probate process empties your “pockets” of all the stuff you own. By adding a living trust to your plan, the legal bucket (and not your pockets) now holds your assets. When you die, you simply let go of the bucket. The trust survives your death, and your assets are distributed according to its terms rather than through probate.
● Portability. A living trust that was validly formed in one state will be recognized as valid in other states. By adding a living trust to your estate plan, you gain portability, which saves time and money if you move to a different state.
● Asset protection for heirs. A skilled estate planning attorney can build asset protection into your children’s trust, which springs to life upon your death. Asset protection planning serves to protect their inheritance from potential divorce, bankruptcy, business failure, litigation, and other future creditors.
Many clients ask whether they still need a will after establishing a living trust. Importantly, a trust does not replace a will. When you add a living trust to your estate plan, your will should be a pour-over will. This means that any assets that may have been left out of your trust will be poured over from the will and into the trust when you die, potentially saving time and resources in the administration of your estate.
Adding an Asset Protection Trust to Strengthen Your Estate Plan
Going back to our railroad analogy, imagine adding a third car (a caboose) to your estate planning train—the asset protection trust. If established and funded properly in advance, an asset protection trust provides one key benefit: it will protect your assets from loss in the event of future litigation, long-term care, or unreimbursed medical costs. However, you must establish and fund the asset protection trust prior to any incident that leads to litigation. In other words, you cannot wait until you are served in a lawsuit or are involved in an accident and then rush to your lawyer’s office to create one. Asset protection trust planning must be set up in advance of the need and will typically require you to endorse an affidavit of solvency to avoid allegations of fraudulent intent.
The current requirement is that the asset protection trust must have been in existence for five years for U.S. citizens and three years for veterans (defined as those who served ninety days or more, including at least one day of wartime service, and who were honorably discharged). It must also have been properly funded (the process of ensuring that your assets are added to your trust by change of title or beneficiary designation), which your qualified estate planning attorney will facilitate. If these requirements are met, and if you meet the needs basis for care, you may then become eligible for Medicaid (for citizens) or the Veterans Affairs Aid and Attendance program (for veterans and their spouses) to pay for or assist you with expenses associated with in-home care, assisted living, or nursing home care.
Many clients ask if they still need a living trust after they form an asset protection trust. The answer is yes. You need all three cars—the will, the living trust, and the asset protection trust—in your estate planning train to create an integrated system. You live out of your living trust and protect your assets with your asset protection trust. The living trust is like your wallet, and the asset protection trust is like your safe in the basement.
The pour-over will, living trust, and asset protection trust work together to provide a solid and effective estate plan. There is so much more to learn and appreciate about each of these components, but I hope that now you, too, will know the rest of the story when you contact a law firm to begin your own estate planning.
Learn more about these approaches in our FREE, live workshop (now also on Zoom video live), sign up is free, and we have workshop dates and time during the weekdays and in the evenings 2-3 times per month. Sign up for free at by clicking this link for the sign up page on our website.
Attorney H. Van Smith practices estate planning and estate litigation at Smith Strong, PLC in Richmond, Virginia. He has received both the Super Lawyers' Rising Star and Virginia Business Magazine’s Legal Elite designation for the years 2014 through 2021. His free, live workshop continues to garner rave reviews.