A Suze Orman exclusive

A will is a legal document that states how you intend your assets to be distributed when you die; it identifies to whom you wish to leave your money and property (your estate).

So let's say your mom owns a home in California. The home is worth $200,000 and has a mortgage on it of about $190,000. (Yeah, I know; anyone living in California these days would already be dead, from shock, if they found a decent home for $200,000. But just humor me for the sake of a simple example.) And let's say you moved in with Mom after your high-tech job disappeared; she loves your company and makes plans to leave you the house in her will. She got a will because when she asked her attorney about whether a trust would make sense, he told her there was no need. Besides, all her friends told her they had wills, so Mom figured that was best.

Next, Mom dies. You have the will declaring the house is yours. The only problem is that the deed to the house, the legal document that states who the owner is, is still in your mom's name. The only way for you to get the title into your name is to go to court. Yup, you have to go through court to get Mom's clear and express wishes carried out. This court process is known as probate.

It is not fun. First, the probate judge authenticates the will and makes sure that you are indeed entitled to your mom's house. Then the judge will sign the deed over to you. Sounds simple, except that it can take forever. In California, that simple process can take nine months to two years. And if you live in a state like California, be prepared to pay statutory probate fees. That word "statutory" means that the fees are set by the state. What's nutty is in the case I just described you would have to pay about $10,300 to the executor and lawyer who handled the probate. That's because the probate fees are based on the value of the home, not the equity the owner has built up. So even if you only have a measly $10,000 in equity and a $190,000 mortgage to carry, the probate fee is based on the $200,000 home value - making the fee to secure your rightful asset more than the asset itself!

The rules on how probate is handled vary from state to state. In states where there is no statutory fee structure, lawyers may be free to set their own rates. The bottom line is that if you rely on a will you are going to require your family to spend time and money to get your estate settled. Catch my drift? At a time when they are grieving your loss, you will have inadvertently added more stress and work for them by your use of a will.

If You Love Your Family, Trust'em
That brings us to option #2: a revocable trust.

Let's define a few of the terms you should know to understand how a revocable trust works. "Trust" is the name of the document. "Revocable" means you can make changes at any time. And here's how it can make life easier. If Mom had set up a trust rather than just a will, she could have taken the steps while she was alive to transfer the title of her home from her individual name into the name of the trust. So rather than Mom Yahoo on the deed, it would read Mom Yahoo, trustee for the Mom Yahoo Trust. She is the "trustor" or "settlor," the one who created the trust. She is also the "trustee," the person who makes all the decisions over the trust. While she is alive everything in the trust - in this case, the house - is completely under her control. She can sell the house, refinance, take out a reverse mortgage, or change who is to inherit the home. She is free to do anything she wants with that house while she is alive. But the great thing is that when she dies there's no need to schlep off to court and go through probate. Control of the contents of the trust automatically passes to the beneficiary, without any court action or public financial disclosure. All that is required is a death certificate and a trust document that runs through which beneficiary is to receive which asset.

No Kidding Around
Revocable trusts are especially important if you have young children. The revocable trust gives you more flexibility in determining how your children will inherit your assets. Don't tell me you don't know someone who inherited a lot of money when they were young and ran threw it quicker than a New York minute. And if you are a single parent with young kids, a trust is twice as important. If something happens to you, how can you be sure the person designated in your will as the custodian of your young child's money is capable of doing that?

Then there's all the court hassles. If all you have is a will and life insurance, and your five-year-old child is the sole beneficiary, the insurance company won't release the money without a court guardianship being created. That can cost as much as $10,000. It also gives the court the right to decide how the money is used. Oftentimes the court will deny the guardian the use of these funds to support the child if other funds, like social security for orphans, are available. The court will order the life insurance proceeds to be kept in a blocked account that can't be touched until the child is 18. Then when the child is 18, they get all the money. Yikes. That is surely not your intention. You want your child to be raised on social security and then be free to blow the insurance payout when they are 18?

A revocable trust sidesteps all these issues. There is no need for probate guardianship.