Understanding Wills vs. Living Trusts vs. Asset Protection Planning
As managing partner of our law firm, I will sometimes listen in on the phone calls of new clients to train staff members, and a question that is often asked, “Does your law firm do wills? And how much do they cost?”
I remember my mother listening to Paul Harvey, the late radio personality, growing up. And Harvey always ended his broadcast with the familiar line, “And now you know the rest of the story!”
I’d like to share with you the rest of the story when it comes to estate planning. Everyone should have a will, no doubt about it, but I’d like to draw your attention to the rest of your estate planning options. I was once in a consultation, years ago, and heard a familiar story, see if this sounds like someone you know, or a family member of yours.
The eldest daughter sat in our conference room, and once situated, said:
Hi Van, I’m the executor of my mother’s estate, and your law firm came highly recommended for estate work. My mom was a good saver, she and my dad lived frugally, never spent extravagantly—but Van, by the end of her life, the long-term care facility and unreimbursed medical expenses had gobbled up much of their savings and retirement.
So, there’s the house, the car in the driveway, and a little bit left in the bank, and that’s about it . . . so our job for probate should be pretty straight forward . . . .
Now, I’m not going to ruin her day, but I’m thinking to myself, “Had her mother come to see me six or seven years ago, I could have saved her family $275,000 to $320,000, or more, with estate planning solutions she’s never even heard of.”
I endeavored in that moment to design a free workshop for our community that I’m happy to say is in its 7th year to rave reviews—to help families just like hers know the rest of the story when it comes to estate planning, in three easy steps. Let’s get started.
ONE: THE FOUNDATION OF GOOD ESTATE PLANNING
Everyone, at minimum, should have a will. A will, simply put, is here’s my stuff, and here’s who gets it when I die. If you have minor or special needs children, we will add additional protection and guardian language for them in the will.
And most folks think of estate planning as just that, “when I die, X.” But the foundation of good estate planning includes a rulebook for how to manage your finances and health before you die. Statistically speaking, you will have a lot of good years in retirement, but then as you age, for 52% living in the U.S., there will be a period of years where in part or in full your care and finances will be managed by a family member or agent.
Therefore, the foundation of good estate planning includes:
- Power of Attorney (managing finances if you can no longer manage them yourself);
- Healthcare Power of Attorney or Advance Medical Directive (managing your health if you can no longer speak for yourself);
- HIPAA (so your healthcare agent can get information transferred between primary care doctor A to hospital B);
- Living Will (different from the will, above, as a Living Will is the “pull the plug” document, or not, depending on your views on that topic, critically important to have in place so we know what you would have wanted, to avoid conflict, litigation, or delay. You make the decision now, so your loved ones don’t have to later.);
- Personal Effects (noting who you wish to receive the sentimental items that tell your family’s story, jewelry, and special collections);
- Memorial Instructions (whether you wish to be buried or cremated, what you want read, said, or done at any funeral or celebration service, etc., so your family does exactly what you would have wanted, providing tremendous peace of mind to them in that critical first week after your death).
Now many will read that list, particularly young people, and then google Power of Attorney, thinking, “Well, Van said I needed Power of Attorney, and there’s one,” fill it in with blue ink, notarize at the bank and think, “I’m good!” Wrong. The title on the top of the document may be the same, but the effect, the rulebook, the outcome, is far different. The fill-in-the-blank documents found online provide a blank check to your agent—and as we live longer—opening up far greater opportunity for your agent, innocently or intentionally, to mishandle your finances or care.
You wouldn’t sign a blank check, give it to your adult child before your surgery, and say, “just write the check for whatever you need to keep my finances in order, and we’ll figure this out later.” But that’s exactly what you’ve done without a rulebook in a properly drafted estate plan, which underpins these documents listed above. Good estate planning attorneys create plans that skillfully guide your agents—reducing innocent or intentional mishandling of your finances or care when you can no longer speak for yourself.
With only the will-based estate plan, keep in mind you will face:
- Probate (the process of inventorying and accounting for your assets and debts when you die, in the county or city of your residence, which in Virginia, as in many states, it often takes 2-3 years and costs upwards of 3-5% of the total estate) (PS: 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);
- Good in 1 state (we find most people don’t realize a will-only based estate plan is good in the state it is written in; so, if you move states, you must update your will-based estate plan);
- Heirs inherit outright (most wills outline that heirs inherit outright, assuming they’re of appropriate age; but one of the worst things we can do as parents is give to our children via wills outright. This is a nationwide statistic, 87% of adult children will spend, have taken in divorce, or be stripped or (thru litigation/bankruptcy/business failure/debt) their parent’s inheritance to them within 18 months of their parent’s death. Read that sentence again.)
We can do better, and our clients experience a far better outcome, once they understand the rest of the story.
TWO: CONSIDER ADDING A REVOCABLE LIVING TRUST TO YOUR ESTATE PLAN
There is a railroad track leading to the main train station in town just behind our law office. I want you to imagine you’re the conductor of your own estate planning train on the railroad (straighten that conductor hat in your mind). The first car on the train of your estate planning railroad is the will-based car, outlined above.
Now, with your conductor hat on, I want you to imagine adding a second car to your estate planning railroad—the Living Trust. Link that second car in your mind, bringing your hands together in your mind, adding it to your estate plan. What is a Trust? What are the advantages to adding this second car to your estate plan?
First, a Living Trust is simply a legal bucket that holds your stuff. You can put assets in and you can take assets out—that’s what revocable means, it’s a fancy legal word for take-it-outable [remember: revocable, takeitoutable].
You can file taxes the same way you always have, in most instances, when working with a skilled attorney that focuses on this area of the law (as we do at our law firm), you can put money in and take money out without any restrictions. You spend your money the same way you always have. When you put your key in the door of your home at night, the neighbors don’t whisper, “Oh, there’s those trust people I’ve heard about.” Not at all! See, a living trust is an invisible legal bucket around your stuff. You can use and spend your stuff the same way you always have, but now, there’s a legal bucket holding your stuff.
And by adding this legal bucket, the Living Trust, to your estate plan, it provides several key advantages:
- Avoid Probate (By adding the second car, the Living Trust, you avoid probate. How? Imagine when you die, they must empty your “pockets” of all the stuff you own. By adding a Living Trust to your plan, the legal bucket now holds your assets, so, when you die, you simply let go of the bucket, the trust didn’t die, you did. The trust survives death; therefore, the trust avoids probate. See?)
- Good in all 50 states (By adding a Living Trust to your estate plan, if written properly by a skilled attorney, you gain portability, because a trust is a federal law-based document, unlike a will, that is a state law-based document. Because of the full faith and credit of the US Constitution, by adding a Living Trust, you gain portability, saving time and money if you move states for work or in retirement.)
- Asset Protection for Heirs (A skilled estate planning attorney can ensure your heirs inherit with asset protection built into your children’s trust that springs to life upon your death, protecting your inheritance to them from their own potential divorce, bankruptcy, business failure, or litigation of their own, down the road, ensuring your inheritance to them remains from protected from predators that wish to take it from them later on.)
Many clients will ask, if I get a Living Trust, do I still need a Will? It’s not will or trust, It’s will and trust. When you add a Living Trust to your estate plan, the will should become a Pourover Will. This allows you to pour in assets left out of the trust when you die (pouring these assets into your trust), potentially saving time and resources in the administration of your estate.
THREE: ADDING AN ASSET TRUST FOR FURTHER PROTECTION TO YOUR ESTATE PLAN
Going back to our railroad analogy, with your conductor hat on, I want you to imagine adding a third car, the caboose, to your estate planning railroad—the Asset Trust. By adding this Asset Trust, you gain, in particular, one key benefit, if established and funded properly, in advance:
- Avoid potentially going broke later in litigation, in possible Long-Term Care, or with future unreimbursed medical costs (Note: you must establish and fund the Asset Trust prior to the incident leading to litigation, in other words, you can’t be served a lawsuit, or say, get in an accident, then rush to the asset trust lawyer’s office. Asset trust planning must be set up in advance of the need, typically endorsing an Affidavit of Solvency, to avoid fraudulent intent.)
By adding the caboose to your estate plan, the Asset Trust, if set up in advance—currently set forth as five years for U.S. citizens and three years for veterans (veteran defined as having served 90 or more days, 1 of those days the country was at war, and honorably discharged)—and funded properly (funding is ensuring your assets, by title or beneficiary designation, are added to your trust) you may then be eligible, upon meeting the needs-basis for care, become eligible for Medicaid (for citizens) or the Veterans Affairs Aid & Attendance Program (for veterans and their spouses) to then pay for or assist you with your expenses associated with in-home care, assisted living, or nursing home care.
You should expect your qualified estate planning attorney to provide a funding meeting to ensure you then fund (i.e., put your assets in) your Asset Trust properly.
Many clients will ask, “Well, if I get the Asset Trust, do I still need the Living Trust?” You need all three cars to your estate plan, as it’s an integrated system. You live out of your Living Trust, and protect with your Asset Trust. The Living Trust is like your wallet, you live out of your living trust, and the Asset Trust is like your safe in the basement, you protect with your asset trust.
The Pour-Over Will | Living Trust | Asset Trust is an integrated system for solid estate planning. You do not have to get all three at once, but don’t forget, you must establish and fund the asset trust in advance for the full benefit of protection and eligibility in the future for Medicaid (5 years in advance) or V.A. Aid & Attendance (3 years in advance for veterans and their spouses).
Transfers between trusts depend on how you and your attorney design your estate plan, based on your unique needs, which can be reviewed in your consultation with the attorney.
At Smith Strong, PLC, we outline the following roadmap for our estate planning clients, and you can expect a similar path to establishing your own estate plan:
- Education: Attend an educational seminar or workshop by a qualified estate planning attorney in your area;
- Consultation: By “Zoom” or in-person, meet face-to-face, with your spouse or partner and the attorney in attendance, to review your unique situation in detail, once you’ve been educated to your options and understand that attorney’s approach, going into the meeting;
- Design Review: You should expect to receive an executive summary of your estate plan, sent to you before the signing meeting, to ensure names are spelled correctly and in the right order, for instance, among other plan design features—so there are no (ideally) surprises at the signing meeting;
- Signing: Your attorney will ensure your signing meeting enables your estate plan to be executed correctly, typically attended by witnesses and/or notary public;
- Funding: This is where some estate plans go off track. When establishing a trust, make sure you huddle up with your attorney after signing, if you get a Living Trust or Living-and-Asset Trusts, to ensure your assets, by title or beneficiary, are placed into your trust properly;
- Client Care: Most qualified estate planning law firms will have a maintenance or client care program of some kind to follow-up and ensure you and your family’s estate planning needs are served through your elder years, incapacity, and eventual transition following death to the next generation.
There is so much more to learn and appreciate about each one of these three steps to effective planning, but hopefully now, when you contact the law firm to get started, you too will know the rest of the story when it comes to estate planning.
Sign up for our free estate planning workshop, and receive a free consultation by attending: www.SmithStrongWorkshop.com.
H. Van Smith practices estate planning and estate litigation at Smith Strong, PLC in Richmond, Virginia, receiving both the Super Lawyers' Rising Star and Virginia Business Magazine’s Legal Elite designation, 2014-2021.