Wills, Trusts, and Estate Planning: When to Start and Mistakes to Avoid
An estate plan requires planning. To put a fine point on it, a solid estate plan determines who gets what when you die, “preferably in a tax-efficient manner and with creditor protection,” says Robert H. Sitkoff, the John L. Gray professor of law at Harvard Law School.
But death isn’t the sole reason for estate planning. A thorough plan will also include incapacity planning—deciding who will make decisions for you and who will take care of your children if you become debilitated. As we all know but would rather not think about, “mental and physical decay may precede death,” says Sitkoff. That’s why incapacity planning is a part of a good estate plan and is becoming more important because of our “ever-increasing human longevity.”
Sitkoff is an expert in wills, trusts, estates, and fiduciary administration. He is the lead coauthor of Wills, Trusts, and Estates (10th ed.), a thought-provoking coursebook, as well as an author of various works published in the Yale Law Journal, the Stanford Law Review, and other academic journals. Estate planning goes well beyond numbers, documents, and law however. As Sitkoff explains, “every estate plan is a drama in human relationships.”
A Q&A with Robert H. Sitkoff
Yes. The utility of stating a preference for who will care for a minor child does not depend on wealth, nor does the importance of planning for incapacity, at least with respect to naming a person to make your health care decisions. Even for a person with modest resources, the default rules for disposition of property at death, known as intestacy, might not fit the person’s circumstances. Those default rules tend to assume a traditional family. But as social norms evolve and family and family-like relationships become ever more varied and complex, those default rules might not be apt. Consider adoption, assisted reproductive technology, multiple marriages, blended families with stepchildren, or unmarried cohabiting partners, to name just a few examples.
With a little planning, a person’s property can be arranged to avoid probate. Even if you live in a state with a smooth probate process, planning is important to bring order to disparate kinds of property and modes of transfer.
One court in each county has jurisdiction over the administration of a decedent’s estate. The name of this court varies, but collectively we refer to them as probate courts. To go through probate is to have an estate administered in a probate court, and property that passes under a person’s will or by intestacy is known as probate property.
There was a time when probate was the only readily available way to transfer clear title to property at a person’s death, and most property was probate property. But that time is long in the past. In response to probate’s (sometimes well-deserved) reputation for being slow, cumbersome, and expensive, lawyers and financial institutions developed nonprobate alternatives, sometimes called will substitutes. Today much more property passes outside of probate by will substitute than within probate by will or intestacy. Property that passes by will substitute outside of probate is said to be nonprobate property.
Here are some examples to consider: If you are married and own a home, probably you and your spouse own the home as joint tenants, which means the survivor will take full ownership without the property passing through probate. The same is true for a joint bank or brokerage account. Moreover, when opening a bank, brokerage, or pension account (whether a 401(k) at work or a private IRA), you probably signed a pay-on-death or transfer-on-death form, naming a death beneficiary to take ownership of the account, allowing it to pass outside of probate. Your home, bank, brokerage, and pension accounts probably reflect the bulk of your property. Life insurance, too, is typically a nonprobate transfer, avoiding probate if you name a survivor rather than your estate as the death beneficiary.
A will is a formal expression of a person’s intended property dispositions at death. To be valid, a will must be executed in accordance with certain statutory formalities, which typically include writing, signature by the person, and signatures by two witnesses. In some states, additional formalities are also required. The upshot is that a valid will ensures that your probate property will be distributed in accordance with your actual intent rather than the presumed intent of intestacy, that is, the otherwise applicable default rules.
However, a will reaches only your probate property. If you have joint tenancy property; if you signed a pay-on-death or transfer-on-death form when you opened a bank, brokerage, or pension account; or if you have life insurance, in almost all cases those dispositions will not be changeable by will. This point is not well understood, and it is the source of unfortunate mistakes. One example would be if you name your spouse as your pension account or life insurance beneficiary but then get divorced and make a new will but don’t update your beneficiary designations. The U.S. Supreme Court just decided a case with exactly these facts.
A living trust, known as an inter vivos trust in legal jargon, is a trust that you create during life. Property put in a living trust during your life passes at your death in accordance with the terms of the trust, avoiding probate. During life, however, the terms of the trust can provide that you remain entitled to the property, most obviously by making the trust revocable. A revocable trust thus resembles a will. Any property you put in the trust remains available to you during life, and you remain free to revise the terms of the trust until you die, but when you die, the trust property passes outside of probate. By putting property in a living trust, you transform the property into nonprobate property.
A revocable living trust not only avoids probate to the extent that it is funded during life but because it is not asset-specific, a living trust can be used also to consolidate the disposition of all of your property, probate and nonprobate, under one instrument. Consolidation is accomplished by naming the trust as the beneficiary of all of your will substitutes and as the beneficiary under your will. To change your estate plan later, say after a divorce, you need only amend your trust. In this way, the living trust has come to function as the will did in the days before the proliferation of nonprobate property and will substitutes.
Trusts and estates lawyers are life cycle lawyers. In this respect, we are like the clergy of the legal profession. Reaching adulthood, marriage, children, divorce, remarriage, more children, adulthood of children, marriage of children, grandchildren, illnesses, death, and everything in between—every major life cycle moment—could have ramifications for estate planning. A change in jobs, wealth, health, and the tax laws could also have estate planning ramifications. Therefore, someone should consider estate planning upon adulthood and then should review the plan periodically and update it to prevent staleness. For example, as we discussed above, a recurring mistake, prompting unfortunate litigation, is to fail to update death beneficiary designations upon divorce.
In addition to identifying who will take what property, a good estate plan will address guardianship of minor children, incapacity planning (both property management and health care decisions), and coordination of what could be a multitude of disparate probate and nonprobate transfers scattered across multiple bank, brokerage, and pension accounts, plus life insurance.
Regarding life insurance, another advantage to starting planning sooner than later is that you can lock in a cheaper life insurance policy when you are younger and healthier. Life insurance is commonly used to insure against lost income on the death of a wage earner. Young parents who are healthy can usually obtain relatively cheap twenty- or thirty-year term policies, covering the period of acute vulnerability before their children are self-sufficient.
The trick is to balance the cost of the premiums with the need to get enough insurance to protect the financial security of the insured’s family in the event of the insured’s death. A too-common mistake is not insuring against the death of a partner who is not a wage earner but rather works inside the home. Replacing childcare and other household production can be quite expensive, and the death of a partner may limit the ability of the survivor to earn money by working outside of the home.
A good lawyer can make a big difference, but so can a bad lawyer in the other direction. Among other things, a good lawyer will know what questions to ask, surfacing issues and problems that you might not think of otherwise. Trusts and estates practice is a window on the tapestry of humanity. This is a field concerned with people and their most intimate relationships. Understanding the ambivalences of the human heart and the richness of human frailty and realizing that even the best-constructed estate plans may crumble with changes in circumstances are essential to being a counselor at law, as opposed to being a mere lawyer. There is nothing like the death of a moneyed member of a family to show people as they really are, virtuous or conniving, generous or grasping. Every estate plan is a drama in human relationships—and the lawyer, as counselor, drafter, or advocate, is an important figure in the dramatis personae.
When I’m asked for a referral in a region where I don’t know any trusts and estates lawyers personally, I usually suggest a look at the membership rolls of the American College of Trust and Estate Counsel.
Self-help through a do-it-yourself, fill-in-the-blanks will formbook is asking for trouble because of the need to attend to nonprobate transfers. Online estate planning services are an interesting development with potential. Relying on extensive algorithms prepared in coordination with good lawyers, these services aim to provide an interactive experience approaching artificial intelligence that accounts for nonprobate modes of transfer. I’m on the Legal Advisory Board of willing.com, so I’m not objective about developments in this space, but I will say that I’ve been impressed with how the folks who run that company have worked to attend to holistic estate planning, including nonprobate and incapacity issues, rather than providing a false sense of security through a simple will.
This is another example of where a simple do-it-yourself will can lead you astray. A surviving minor child raises two different kinds of guardianship questions: Who will be responsible for taking care of the minor, and who will be responsible for managing the minor’s property. These don’t have to be the same person! For example, if you and your spouse both die while your child is a minor, you might think your spouse’s sister would be the best person to take care of the child, but your brother would be the best person to manage the property you leave behind.
With respect to taking care of the child, known as guardianship of the person, in most states, a parent’s appointment by will of a guardian, although not formally binding, is nonetheless persuasive in the court’s reckoning of the best interests of the child. People commonly select a family member, often a sibling, or sometimes a friend. It is a good idea also to select an alternate. A guardianship of the person ends when the minor reaches the age of majority (or dies).
With respect to property management, several alternatives are available: guardianship of the property or conservatorship (depending on the state), custodianship, and trusteeship. Of these options, the latter two are preferable on grounds of cost and flexibility, but they are available only with advance planning—and a trust is the best of all. For example, under a guardianship or conservatorship, the child must receive the property at eighteen, and under a custodianship, at eighteen or twenty-one. But a trust can postpone possession until a later age—twenty-five, thirty, or thirty-five—or can leave that decision to the trustee with the investment management of the property also in the hands of the trustee in the meantime.
In rough terms, we can divide law into two categories: public law and private law. Public law speaks to the organization of government and government power. So public law includes constitutional law, criminal law, and administrative law (that is, the law applicable to government bureaucracy). Private law, by contrast, speaks to your relationships with other people, companies, and organizations. So private law includes contract law, tort law, and, of particular relevance to our conversation, trusts and estates generally or succession law.
Public law gets more media attention. But the main function of public law is to provide a rule-of-law infrastructure so that you may order your life and affairs—what is commonly called private ordering—as you wish. In this private ordering, you will rely on the tools furnished by private law. For example, in choosing to marry or cohabitate or to take a job as an employee or build your own business, private law provides the tools to implement your choices. For this reason, private law governs our most intimate personal and professional relationships, culminating with succession on death. The business of private law is private ordering.
Robert H. Sitkoff is the John L. Gray Professor of Law at Harvard Law School. An expert in wills, trusts, estates, and fiduciary administration, he was the youngest professor with tenure to receive a chair in the history of the school. Sitkoff’s research focuses on economic and empirical analysis of trusts, estates, and fiduciary administration. His work has been published in leading scholarly journals including the Yale Law Journal, the Stanford Law Review, and the Journal of Law and Economics. Sitkoff is the lead coauthor of Wills, Trusts, and Estates (10th ed. 2017), the most popular American coursebook on trusts and estates. Sitkoff is a past chair of the Section on Trusts and Estates of the Association of American Law Schools and is an academic fellow of the American College of Trust and Estate Counsel.