Will or Trust?
Getting your parents to talk about passing their possessions on after their death can be a bit uncomfortable. Who wants to talk about dying? The conversation is not easy but it is essential. Too much time and money are wasted because of poor planning.
At Boom Baby Boomer we turn to the experts for basic understanding of the issues that are inevitable.
For estate planning we turn to lawyer Paul Brown a partner with Chandler and Brown law firm in St. Paul, MN.
A will is a document that is relatively cheap to produce and divides the family assets up once both parents have passed on. A will can very specifically say who will get your dad's antique duck decoys or your mother's silverware collection. A will then goes through a very public process called probate. The court reviews the will and a public notice is placed in the newspaper so creditors have a specific amount of time to make a claim on any of the assets. In Minnesota it's four months. If creditors don't make their claim within the four months too bad, they're out of luck. Attorney Paul Brown says this is the one advantage to a will. It cuts off the time a creditor can make a claim.
Most of the cost of a will comes after parents' deaths. You will almost always need a paralegal and or lawyer to help you compile the documents needed for the probate court.
What is called a revocable, living trust is, in its most basic form, a private probate. Paul Brown says because the court is not involved it's a quicker, nicer way. He says in Minnesota if your parents have under a million dollars in assets it's also a fairly simple process. Basically, you title the assets in a trust while your parents are still alive and the document explains how those assets will be shared upon their death. Having the assets in the trust ensures money is available to pay the bills upon the passing of your parents and then names one or more of the surviving children to divide the remaining assets. A trust does not limit the time a creditor can make a claim and Brown says if there are disagreements between the children the court is always available to sort out the dispute. The cost to prepare the trust is paid up front. The cost depends on how complicated the trust is and who you hire.
Brown also points out two common mistakes people make after setting up a trust. First they neglect to update deeds to real estate. For example, if a parent sells the family home and buys a condominium it is crucial to get the new deed in the trust. If it's not, it will have to go through probate.
He also says people forget to update beneficiaries on life insurance and IRA's. This is especially common in a divorce.
Another common mistake he sees parents make these days is giving away the house too soon. Brown says parents are putting their homes in the children's name to protect it from the government if they end up in a nursing home and run out of money. But, he says, that means the children will pay capital gains tax when they sell the home because it's not their primary residence. The capital gains tax is about 22% these days. If they inherited the house there would be no tax assuming their parents assets are under a million dollars in Minnesota. Even if the assets are over a million dollars the estate tax is about 15%, still less than the 22%. The odds of dying in a nursing home are really not that great so Brown says think twice before you have your parents put their home in your name.
You should discuss having one of the children's names on a parent's checking or savings account or setting up what's called Pay on Death at the bank. This gives one of the surviving children immediate ability to pay bills out of the parent's checking or savings account. The risk of course is they'll do more than pay the bills; they'll help themselves to extra money. But, if there is no immediate access to money it's tough to pay for funeral costs and the heat bill due on the family home.