Reducing the Estate: Estate Expenses
A typical estate also faces a variety of expenses, and most are due almost immediately after death. These expenses can add up to a substantial sum.
Probate charges These include court costs, attorneys’ fees, executors’ commissions, administrative costs, appraiser’s fees, and accountants’ fees. Probate costs vary significantly by state. Unless the estate is complex or the plan is ambiguous or nonexistent, probate costs typically run between 5 percent and 10 percent of the total estate. For a $1 million estate, that could mean costs of between $50,000 and $100,000—and that’s without any
Debts The estate must settle all debts of the deceased, including mortgages, car loans, and credit
Using Trusts to Meet Unique Needs
A trust is a common legal entity created to hold and manage assets on behalf of named
beneficiaries. The trust’s creator (called a grantor) may be the beneficiary, or the grantor may name others to receive the assets. When a grantor puts assets into a trust, the trust—not the grantor—owns those assets. This effectively removes them from the grantor’s estate.
Trusts are versatile. An individual can set up a trust during life (a living trust or inter vivos trust) or through a will at death (a testamentary trust). Trusts can be revocable or irrevocable. They can meet important needs when it comes to planning for minor children, spendthrift heirs, retirement, tax minimization, or gifts to charity.
Planning Benefits Beyond a Will
Creating trust is more expensive than writing a will, but also offers benefits that a will does not. Trust can:
- Provide professional property management
- reduce taxes
- transfer assets easily at death
- Provide flexibility in disposing of assets
- Avoid probate—which avoids costs and delays
- protect privacy (unlike a will, a trust is not open to public scrutiny)
Revocable vs. Irrevocable Trust
A revocable trust provides flexibility. It gives the grantor the freedom to change trust provisions or to sell, spend, or give away trust assets. The grantor can instruct an attorney to prepare a written amendment to the trust at any time without tax or other penalties. In addition, the grantor can revoke the trust entirely at any time and reclaim outright ownership of the trust property. This provides added security for individuals who are concerned about not having access to assets in case of a future emergency.
An irrevocable trust, of course, requires the grantor to give up all control of the assets, with no
opportunity to make changes in the future. Assets transferred to the trust are treated like a gift and are subject to the federal gift tax. In exchange, the grantor receives an exemption from federal estate taxes. This works out well for grantors who wish to give assets to children or grandchildren while minimizing estate taxes.
A Substitute for a Will
Some estate owners decide to use a revocable living trust as a substitute for a will. A revocable living trust accomplishes important estate planning objectives:
- avoids probate, publicity, and expense
- allows the grantor to retain rights to the trust during life
- ensures that assets are eventually distributed according to the grantor’s wishes