The 9 Steps to Financial Freedom (11 page)

What is a will? A will is simply a piece of paper that states who you want to get what when you die. But it’s also a legal
document, which is where the trouble can begin. When you’re dealing with a will, you’re dealing with the courts.

When Nancy made up her will, she truly believed that everything—the house, their children—would pass smoothly to Jeff. She thought everything was in order. But a will often takes a circuitous route to get where it’s meant to go, and in many cases it can be a very expensive route as well.

How do you obtain a will?

There are a few ways to get a will. You can have a lawyer draw one up. This should cost from a hundred to a few thousand dollars, depending on where you live and how complex your affairs are. You can get a computer program that will generate a will for you for about $30 to $60. If you use any of these methods, you’ll also need to sign your will and, while you are signing it, to have two or three people witness your signature and sign the will as well. Some states require two signatures, some three, so to be on the safe side, ask three people to witness your signature. When you want to change anything in the will, you simply draw up what is called a
codicil
, which is an additional paper enumerating your changes. Follow the same procedure as when you signed the will in the first place.

If you want, you can draw up a will yourself on a piece of paper, which will cost you nothing. This is known as a
holographic will
. Just make sure that the paper you use has no other writing on it or the will will not be considered legal. Make sure, too, that the entire will is written in your handwriting and is dated and signed by you. If you make a mistake, don’t cross it out. Start over. Anything crossed out is considered an interlineation, making the will null and void. Do not have anyone else witness a holographic will because, again, this will make it null and void. If you want to change a holographic will, it is better just to redo the entire thing.

Your will should specify an
executor
. This is the person who will make sure that all the legal, financial, and emotional matters are taken care of after you have died and that the wishes expressed in your will are carried out. Executors deal with the legal system and the accountant and all the beneficiaries. They contact the banks and insurance companies and inform them of your passing and send in the necessary documentation to change the names on all the accounts to the new owners. For tax purposes, all the property will have to be valued and the final tax returns compiled; and if any money is owed to the IRS, the executor must make sure that it has been paid or set aside before any assets are distributed to the beneficiaries of the will. In many states the executor gets a set fee for having done all these tasks, or, depending on where you live, you may just decide to specify a fee in the will.

So preparing a will is relatively simple. Where it can get complicated, as you saw with Nancy, is in its execution after you have died. All your will says is where you want your property to go. It does not necessarily get it there very easily.

After your death your will has to pass through the court system. Usually the executor has a lawyer handle this. Once the will gets to the court, two things happen. First, a judge has to authenticate the will, to make sure it is valid. After the judge probates the will, he or she will then sign a court order transferring title to the property covered in the will to the people who are intended to receive it, as reflected in the will. In Jeff’s case, for example, title to Nancy’s house would be transferred to his name once probate was completed.

This sounds easy enough, but can be a nightmare.

In the first place, the process can take anywhere from six months to two years or more, while ownership of the property remains in probate limbo.

Nor does this process come cheap. In the state of California,
where Jeff lives, and in many other states, there are statutory probate fees—fees, that is, that are set by law. These are the first fees that have to be paid out for any estate.

What this meant for Jeff was that the court would total the value of Nancy’s estate and then charge a fixed-by-law percentage of that amount for these probate fees. The house was Nancy’s major asset. Now, Nancy had put $50,000 down on the house, and in the few years they’d lived there, she and Jeff had paid off about $15,000 of the $175,000 mortgage she had originally taken out. This left a mortgage of about $160,000. So, since the house is now supposedly worth about $300,000, their equity in the house is $140,000. The bank is owed the rest. One would think that the probate fees would be based on their equity in the house—the $140,000 they actually have in it. But that’s not how it happens. Probate fees are based on the fair market value of the house at the time of death, which means what the value of the house is on the open market. In this case the fair market value is now $300,000. California probate fees for Jeff would be $15,000, plus another $1,000 or so in court costs—just to claim title to the house that he and his wife already thought of as his.

Probate fees vary from state to state—but you get the idea. Probating a will takes time and money, no matter what state you’re in. If your estate is very small, you might be able to avoid probate with a simple will. Assets valued at $10,000 to less than $100,000 (depending on the state) can be transferred to your heir by a simple process called
probate affidavit
. That costs very little, doesn’t take much time, and makes it easy for your survivors to receive what you want them to. Probate affidavit forms are available in most banks at no cost. Be careful, though. Your estate could be worth more than you think. See
this page
for assessing your net worth.

Keep in mind, too, that wills can be contested, which means
that anyone who thinks he or she should have something that the deceased willed to someone else has the right to come to the court and ask for it. Then the judge has to decide. Also, although people commonly use wills to specify guardians for their children, this is merely a recommendation and is not binding. It only express one’s wishes. Even though Jeff is the legal father of his children, and even though the will expressed Nancy’s desire that he be their sole guardian, the legal guardianship of children always rests in the hands of the court. Nancy’s mother knew what she was doing when she flew to California to ask the court for the children. Will she get them? It’s unlikely, but the court will make its decisions based on whatever it feels is in the best interest of the children. Meanwhile, Jeff has to hire—and pay—a lawyer.

Could Nancy have arranged her affairs differently, to save all this agony and expense? At least some trouble could have been avoided if Nancy had set up a revocable living trust.

What Is a Revocable Living Trust?

A
revocable living trust
is a legal document that identifies any assets that will be held in the name of the trust and also designates the person who will manage those assets 1) while you are alive (typically, this is you), 2) in the event of your incapacity, and 3) after your death.

How Is a Revocable Living Trust Different from a Will?

A will simply tells your loved ones and the courts how you want to distribute your money and property after your death. It
doesn’t actually make the distribution happen. A court must do that. A trust is much more straightforward and flexible, for the simple reason that the court is taken out of the process. A trust lets you transfer legal title of your assets into the care of a trustee—usually yourself, but sometimes another person—and to name a
successor trustee
and beneficiaries. This way, assets quickly become the property of your beneficiaries upon your death. Most important,
they do not pass through probate
. The courts are not involved in the transfer of your estate.

Here’s how a trust differs from a will. Let’s say that my mother wants to leave me her home, just as Nancy wanted to leave her home to Jeff. The deed to the home is in my mother’s name. If she has a will, she will have stated her desire that I inherit the house. But when she dies, I have a problem. How is the title of the house going to be changed from her name into my name? That’s where the probate court comes in—a judge must read the will and approve the title transfer. If my mother leaves me the house in a living trust, however, and has signed the deed over to the name of the trust during her lifetime, probate on the house is avoided. The house comes directly to me.

A will states where you want your assets to go after your death; with a revocable living trust, you take the steps while you are alive to sign the title of your property over to the trust.

By the way, anytime you want to you can amend the trust, so you can always change your mind about who gets what. Think of a trust as a suitcase, into which you put the title to your house, your stocks, and your other investments. For each item, you can affix a label, saying who will get it after you die. You carry the suitcase with you while you are alive, and you’re perfectly free to put new things in, take anything out, or change the labels. Then, upon your death, the suitcase gets handed by your successor trustee directly to your beneficiaries, at which time they can take out whatever you’ve labeled as theirs.

In many, many cases—especially in states with statutory probate fees—trusts are far superior to wills. Clients who came to me for financial advice, whether they were single, married, or living together, ended up with a thorough education on trusts.

As we just said in Nancy’s case, if you die leaving a will, in all states the only way for property valued at more than $100,000 (or at as little as $10,000, in some states) to be transferred from the name of the deceased to the name of the beneficiary is to have a judge do it through the probate courts. With a trust you save time and you avoid probate fees and legal fees. If Nancy had a trust instead of a will, and had specified where she wanted the house to go, the house would have gone directly to Jeff. There would have been no probate fee of $15,000, no courts, and no attorneys. Nancy’s wishes would have been carried out smoothly, and Jeff would at least have been allowed to grieve in his own home in peace.

If you own property or other assets, have children, or care about what happens to the people you love after you’re gone, I urge you to look into a trust. When? As soon as possible. There is a fair bit of paperwork involved in switching assets into a trust, so the sooner you’ve set one up, the easier it will be to accumulate assets in the name of the trust.

Where you want your money to go is one concern. Where you
don’t
want it to go is just as important.

This story is dramatic—and it gets worse. But I’ve seen many cases like this. Money can tear apart families, even families that were closer to begin with than this one, faster than anything else.

I met Annie and Sarah because they were referred by a friend who thought they needed some financial help, and I was deeply relieved that they came when they did. Time was of the essence. I opened all the Florida statements that they had filed away, and they were stunned to find out that Sarah’s assets added up to more than $3 million. They had no idea. I noticed something else: many, many trades of stocks and bonds had been going on in her account. How could Sarah have known this, when she didn’t even open the statements or mail that came from the brokerage house? A few calls to the broker later and we found out that it was Peter who was trading the account. The broker figured it was okay because Peter was Sarah’s son. This was no excuse and his actions could have cost that broker his job, but Sarah felt that Harry had liked him and that was good enough. Even so, we convinced her to transfer the entire account to a reputable broker here in California, where she lived. She also worked with an estate and trust lawyer, Janet, an associate of mine I have come to trust by watching how she has worked with other clients in the past, to make decisions about how to best protect her estate.

We put together her revocable living trust and began transferring her assets into it. The assets would remain in her name throughout the rest of her life, then would pass directly to Annie. Because of Sarah’s age and frail health, we also gave Annie
durable power of attorney for health care
, which is covered later in this chapter. Because the estate was large, and because we all felt that Peter would do whatever he could to claim whatever he could, we took an additional precautionary step. We videotaped Sarah talking about the trust, expressing what she wanted to have happen to her estate when she was gone. As we went through the process, Sarah decided in the end that she wanted to leave Peter $10,000. Although frail, Sarah knew exactly what she wanted and what she was doing, and the video reflected that.