This article was originally included in our email newsletter on August 21, 2009. It may have been edited somewhat from the version that was originally emailed, so be sure to sign up in the upper right corner of our website to make sure you are getting our email newsletter hot off the press!

With all of the health care talk–as well as the debacles left behind by recent celebrity deaths–we’re hearing a lot about these:

• Will
• Living Trust
• Guardianship
• Probate

While this is a great opportunity for the media to educate the public on these important legal issues, the truth is often getting mangled. Furthermore, for most of the public, the information is confusing, stressful and they would just rather not hear about it.

So let me clear up the confusion, as one who deals with this on a *daily* basis…

Let’s start with the basics. Typically, in North Carolina, when a person with assets over $20,000 ($30,000 in certain instances) passes away, their assets will be handled in one of three ways:

(1) If they had no will, their assets will be distributed as mandated by the state statutory law through a court proceeding called probate,

(2) If the person had a valid will, the estate will still have to go through the probate process, but the court will carry out their wishes as stated in their will,

(3) If the person had a valid living trust (and their assets were re-titled in the name of their living trust–this is called “funding”), their wishes would be carried out in private, without the court’s involvement.

So … why does it matter to you?

The answer to this question depends on how much you care about what your loved ones will have to deal with after you are gone and how much control you want to have as to who gets what, and when and how they get it.

If you do nothing, you get no input on any of these questions and the court and one of your eager family members/friend/creditor who petitions the court will make these decisions on your behalf through a process called probate. Why do you care about probate? Often, the probate process can take 9-18 months and can be extremely costly. Your loved ones may have limited control and access to assets, it’s stressful for your family, and the process is completely public. The probate process can often lead to squabbling between family members and airing of the family’s dirty laundry.

If a person leaves a valid will, it will still have to go through the probate process described above and the headaches that go along therewith, but the court will have the benefit of knowing how you want your affairs handled. Instead of relying on the laws of intestate succession (which is the law that distributes your assets to your family members in the order of their relation to you–you can read more here), the court will pass on your assets to the specific people you have identified in your will.

Through a valid will, you can control WHO gets your assets, but you will have no control as to HOW and WHEN they get it.

A living trust (that has been properly funded!), on the other hand, gives you more control and offers significant protection to your family. If you are working with an attorney who has expertise in this field, you can control WHO gets your assets, WHEN and HOW they get it without the court’s involvement. Even better–with a living trust, it is a private administration and can generally be handled in a short period of time. Furthermore, a living trust can incorporate a lot of other great protections including protection from taxes, creditors, predators, medical catastrophe, divorce, remarriage and more.

You may be asking yourself: why would someone ever do a will instead of a living trust? Typically, a person will choose a will over a living trust for one of two reasons:

(1) they don’t know the difference between the two or
(2) the perceived “cost” of doing a living trust.

There are some obvious advantages to doing a living trust over a will, but starting with anything is better than ending up with nothing. If you are not yet ready to make a leap into the world of living trusts, a basic, will-based estate plan is a starting point. In addition to giving the court direction about how you want your assets distributed, every estate plan should also include:

(1) an advance health care directive, which identifies the person(s) that will make health care decisions for you, if you’re incapacitated, and expresses your wishes regarding health care treatments;

(2) a durable power of attorney, which identifies the person(s) that will make financial and legal decisions, when you can’t; and

(3) if you have children, it should also include a Children’s Safeguard Plan, naming both short and long term guardians to care for your children in the event of an emergency, as well as clear and specific directions to those guardians about how you would wish your children to be raised in your absence.

While we all care about what happens to our assets, every person over the age of 18 needs to have an advance health care directive and durable power of attorney (this includes adult children heading off to college!).

I hope this clears up the confusion…

If you’d like to read a little more about these documents, here are some links to past blog articles that go more in depth:

What Is A Trust?

Parents: 13 Reasons Why Trusts Aren’t Just For The Wealthy

What Happens If I Die Without A Will?

Problems With Intestacy

What Is A Will? Introduction to North Carolina Wills

What Is Estate Planning?

Two Legal Documents Every Adult Needs: Part 1

Two Legal Documents Ever Adult Needs: Part 2

We’re here to help!

Details of Michael Jackson’s Family Trust were leaked to the media recently. My take? Michael Jackson would have benefited from working with an estate planning lawyer that would have taken the time to educate Michael about available techniques to better protect his children. This is just another example of poor estate planning from a celebrity.

Under the terms of the trust, Michael Jackson’s children are in line to receive $33 million each. Michael’s mother, Katherine Jackson, will receive her share of the estate immediately, and any portion remaining when she passes, will be split between Prince, Paris and Blanket. The children will receive allowances until they are 21 and then at age 30, they’ll receive access to one-third of their trust fund, another third at age 35 and the remainder at age 40.

My guess is that if you have a trust, you may have the same exact distribution terms. How do I know this? Because it’s the “standard” that a majority of lawyers use when they don’t take the time to educate their clients about available options and protections that are available.

So what would I have done differently?

For starters, Michael should have been advised to use a living trust to hold his assets and ensure that all assets were properly titled. This could have kept his family out of the probate court. In short, probate generally costs too much, takes too long, and is totally public. It will be interesting to see how long the probate attorneys manage to keep things tied up in court and how much of the estate is eaten away by legal fees and related probate expenses.

Second, I would have taken the time to educate Michael about how he could have protected both Katherine and the children from a myriad of life risks, including catastrophic illness, lawsuits and creditors, divorce, and more.  Once Michael’s children receive their inheritances outright, the funds will be totally unprotected. What if they have creditor problems? It seems to be a pretty common occurrence for the rich and famous, and let’s face it, MJ didn’t exactly set a great example. If the children are sued or file for bankruptcy, the inheritance is going to be totally unprotected once it hits their bank accounts.

Instead, I would have suggested placing the funds in a lifetime asset protection trust. An asset protection trust can be set up in such a way that the children would still be able to receive allowances from the trust for their living expenses, but because the money is held in trust rather than owned by the children outright, it would be protected from lawsuits, creditors and other life risks.

What if one of the children receives their share outright and later gets divorced? There’s a good chance that part of the inheritance will be lost to the ex in the divorce proceeding? Is that really what Michael would have wanted? Most families I work with want to keep the inheritance within the bloodline.

If the trust had included asset protection, Michael could have had the peace of mind that his children would be well provided for, but also protected from life risks and that the assets could have continued to grow and accumulate for future generations.

Want to learn more? Then visit our website and download our new e-book, The 12 Most Common Threats to Your Estate and Your Family’s Future.

Probate is required whenever a person dies owning assets in his or her name, regardless of whether the decedent had a valid will.  After a person dies, probate is the legal process of administering the estate (i.e. the possessions and liabilities) of the deceased person, who is referred to as the “decedent.”  The person who administers the estate is called the “executor” or “personal representative.”  In North Carolina, the probate process is overseen by the Clerk of Superior Court.  Sometimes probate is also referred to as “estate administration.”

The probate process starts when a family member or personal representative of the decedent files the decedent’s will and other forms and documents with the Clerk of Superior Court in the county of the decedent’s personal residence.  If the decedent did not have a will, then he or she is considered to be “intestate” and a separate form is filed requesting permission from the Clerk of Superior Court to administer the decedent’s estate.

During the Probate Process

During the probate process, the personal representative is required to notify all beneficiaries of the estate, gather all of the decedent’s assets, file an accounting of all of the decedent’s property, settle any debts the decedent owed to creditors, and pay any taxes or administrative expenses owed by the estate.  The role of the Clerk of Superior Court is to oversee the process and ensure that the personal representative properly carries out his or her duties and obligations.

Not All Assets Are Subject to Probate

Some assets are excluded from the probate process in North Carolina.  Assets that are held in joint ownership with rights of survivorship, such as a marital home, will pass automatically to the survivor without being subject to probate.  Any assets that are controlled by a beneficiary designation, such as some retirement accounts, 401(k)s, IRAs, life insurance policies, or annuities, are generally not subject to the probate process.  Finally, if assets are held in a trust, they may not be subject to the probate process.

Concluding of the Probate Process

The probate process ends when all of the decedent’s debts, taxes and administrative expenses have been paid and all of the decedent’s remaining possessions have been distributed to the decedent’s beneficiaries.  At such time, the Clerk of Superior Court will release the personal representative from his or her duties and issue what is referred to as a “closing letter” indicating that the probate process is complete.