This is the second article in my series about Trusts.
In my last article, “We’re All Going to Die, But Your Money Doesn’t Have To” we covered the basics of Trusts. If you haven’t read it yet, you’ll want to read that first. Today, I’m going to go over Wills and Probate, which, as the title suggests, you will want to avoid at all costs.
We’re All Going to Die, But Your Money Doesn’t Have To…But It May If You Only Have a Will
You’ve probably heard of a Will, a legal document that specifies who will inherit your assets when you die. The difference between a Will and a Trust is simple but essential: the Trust has a Trustee whom you select, in other words a person (or entity) whom you designate to control and administer the Trust. Wills, on the other hand, put the final say on where your assets go on the government and courts (this is called Probate), not on your personally chosen Trustee. With a Will, you may have to go to Probate. With a Trust, you almost never do. So, whom do you trust more: a government official or your personally chosen Trustee?
Probate – why you must avoid it at all costs!
Probate Court (simply referred to as “Probate”) is the governmental process of having a judge preside over your assets when you die (and as you’re aware, the government has never, ever, ever made bad decisions, so what are the chances they’ll mess up your stuff?).
If you have a Trust, you skip probate (most of the time). Further, Probate is a public process, which means that anyone can come forward and make a claim on your assets (or look at the documents and see what your assets are, kind of like posting them on Facebook). This public process can be a problem if you have any revenge-consumed enemies or if you have assets that are difficult to value like a business or a piece of art. Anyone at all can stand up and lay their claim to the judge. For example, your old gardener can show up to probate court to say he is owed some money. Family members with whom you’ve had feuds can suddenly claim you were their bestie and assert you promised them riches galore.
If you’ve lived in Las Vegas long, you have heard of Tony Hsieh. He was a tech entrepreneur and billionaire who died in his 40s but didn’t have a trust set up. In Hsieh’s case, this means that the court is now handling his estate (i.e., all his stuff).
Here’s the catch: Hsieh was a very social person with a wide network and hundreds of people figured: Why not get mine?
Now just anyone can come up and lay a claim to Tony’s stuff—and they have! Former associates, acquaintances, friends, not-friends have been coming to the court saying that Tony owed them money; by law, the court must listen to their cases. While that doesn’t mean they will ultimately be awarded anything, they could be. Regardless, it has spawned a nightmare for the rest of his family who, understandably, would like to move on and focus on his legacy, not on those demanding their pound of flesh. Because of the size of Tony Hsieh’s estate, and the fact that it spans multiple states, his probate will likely take years.
But don’t think it’s just about time; because it’s also about money.
Probate, like any governmental process, has costs associated with it. For example, in the state of Nevada, there is an “administrator fee” (also called Probate Fees), which is set by state law to be between (typically) two and four percent (2%-4%).
I had a friend of mine from high school whose uncle had passed away. His uncle had been advised to get a Trust—but he never did. So when his uncle died, the estate was $7 Million. At the time, the beneficiaries didn’t know about the probate fees, so when their uncle’s old accountant told the judge he could be the administrator, they said, “sure.” Well, it wasn’t until later that my friend found out that the beneficiaries had to pay $140,000 in Probate Fees to the old accountant. Ouch!
States like California, New York, Texas, and Florida all have similar probate fees, so aside from the privacy and personal control reasons, you should avoid probate purely due to its cost.
Now that you know about Wills and Probate (bad) and Trusts (good), you’re ready to learn about the different types of trusts you can set up and the costs associated with those. That’s coming up next month.