Are you OK with the possibility of a completely arbitrary set of outdated laws determining how your hard-earned estate is distributed? Are you OK letting these laws determine how much each family member receives and how much estate tax is taken out, while completely leaving out any funds for charitable organizations you supported all your life? Are you OK with the state subjugating your will and replacing it with their own in deciding how the fortune you amassed is split?

If not, then you need a will — a legal document that provides your instructions for managing your estate upon your death.

It may seem OK to let the government determine how to handle your estate, but it is unlikely that their set of rules will distribute your estate the way you would really want your property to be divided — including interests in a business you spent time building and managing.

While the precise rules vary among the 50 states, typically the laws (called the "intestacy laws" that govern when a person dies "intestate" or without a will) are rigid and formulaic. Usually, all of your nearest relatives get a piece of your property, but nobody else inherits through intestacy — not friends, cousins, charities, business partners, etc.

Further, no one gets more than the state-allotted share, even if it's completely arbitrary. Often, this ends up hurting the surviving spouse. In this all-too-common scenario, the decedent's grown children may get money meant for the surviving spouse, even if the surviving spouse then has too little to live on. In some states, the surviving spouse may get only one-third of the decedent's property, or less.

Moreover, the absence of a will often leads to expensive and lengthy court battles by family members contesting the division of assets. Sometimes family members produce questionable documents in court, trying to establish a rightful claim to all or a portion of the estate by attempting to demonstrate the will of the testator. Once again, this can be avoided by having a valid will in place that clearly lays out the testator's intent.

Finally, if you have minor children and both parents die without a will, the courts will decide who becomes the legal guardian of your children. What parents would want to have an unknown judge make the decision of who will care for their children if they die? Avoid this tragedy and create a valid will sooner rather than later.

Why you may need a will and a living trust

For most individuals the question is not whether you really need a will. The question is: Is a valid will enough?

While having a will is certainly better than not having one at all, for most people it is not enough. In many states, you also will want to establish a living trust. The reason: If all you have is a will, then your entire estate will be stuck in the probate process, which is time-consuming, public and costly.

However, if you combine a living trust with a short will — called a Pour-Over Will because it pours most of the assets into the living trust — then the vast majority of the estate will avoid probate completely in most states. Before we examine how a living trust works, we must first see why probate must be avoided.

The pitfalls of probate

Again, while the probate process varies widely among the states, we can make some generalizations here:

Time: Probate often takes between a year and two years to complete in many states. During that time, your beneficiaries must wait for their inheritance.

Money: Probate can cost between 3 percent and 8 percent of your "probate estate," the value of your entire property passing under the will. This pays the courts, the lawyers, appraisers and your executor (the person in charge of handling your affairs during this process), among others.

In some states, these probate fees are paid on your gross estate — not taking into account any mortgages on your assets. In these states, if you die owning $1 million worth of assets, but which have mortgages of $800,000, your estate will pay probate fees on the $1 million, or around $50,000 — money which could have gone to your beneficiaries, rather than to courts and lawyers.

Privacy: Probate is a public process in all states. Anyone interested in your estate can find out details about who inherits under your will, and how much he or she inherits, the beneficiaries' addresses and more.

While you may not be famous and worry about the media exploiting this information, think of your beneficiaries — your surviving family members. They certainly will not appreciate the many financial advisors calling them with "hot tips" on investments. These salespeople find beneficiaries by examining probate records. They know who they are and how much "found money" they have to invest.

Control: In probate, the courts control the timing and final say-so on whether your will — and your wishes expressed in the will — is followed. Your family must follow the court orders, and pay for the process as well. This can be extremely frustrating.

You are probably thinking, "How can anyone use a will, when probate is this unappealing?" It is hard to believe. We are continually astonished by how many families endure the time and expense of probate, when it can be avoidable.

How a living trust solves the problem

A living trust, also called a family trust or loving trust, is a legal document that creates a trust to which you transfer assets during your life. This type of trust is revocable — meaning that it can be revoked, amended or changed by you at any time.

During your life, the assets transferred to the trust are managed and controlled by you — just as if you owned them in your own name. When you die, these trust assets pass to whomever you designated in the trust automatically, outside of the probate process. Other benefits of the living trust include:

• Avoiding the unintentional disinheriting risked by joint tenancy (happens in most second marriages).
• Preventing court control of assets if you become incapacitated.
• Protecting dependents with special needs

How to transfer assets to a living trust

When you transfer your assets to your living trust while you are alive, you maintain 100 percent control over these assets — just as if you still owned them in your own name. For your car, stocks, bonds, bank accounts, home or any other asset, the process of transferring an asset to your living trust is the same.

If the asset has a registration or deed, change the name on such a document. If the asset is jewelry or artwork that has no official ownership record, use an assignment document to officially transfer ownership to your living trust.

These ownership changes will transfer the name of the registration or deed to "John Doe Revocable Living Trust" or "John Doe, Trustee of John Doe Revocable Living Trust," rather than "John Doe" as it now reads. As sole trustee of the trust, you have unlimited power to buy, sell, mortgage, invest, etc. — just as you did before. Further, because the trust is revocable, you can always change beneficiaries, remove or add assets, or even cancel your trust entirely.

And remember — the transfer of assets to the living trust (called funding the trust) is a necessary activity. While it has no income-tax ramifications at all (you are still treated as the owner for income tax purposes), it is crucial to gain the probate-saving benefits afforded to you at the time of your death.

You may name yourself or someone else as trustee

You need not name yourself as the trustee of your living trust, although most people do. You could name an adult child, another relative or close friend or even a corporate trustee, like a local bank or trust company.

When you die, your successor trustee will take over

If you are the trustee while you are alive, you will name in your living trust someone (or something like a corporate trustee) as the successor trustee. That person or entity will take over trustee duties when you die. If you have a third-person trustee or co-trustee while you are alive, that person will complete trustee duties after you have died.

These duties involve collecting income or benefits due your estate, paying your remaining debts, making sure the proper tax returns are filed, and distributing your assets according to the trust instructions. This person or entity acts like an executor for a will. However, unlike a will, actions under a Living Trust’s directions are not subject to court interference.

You decide when your beneficiaries receive their inheritances

Another significant advantage of a living trust over a will can be that you, rather than the courts, decide when and how your beneficiaries get their inheritance. Since the court is not involved, the successor trustee can distribute assets right after he/she/it concludes your final affairs. This can take as little time as weeks or even days.

If you choose, assets need not be distributed right away. Instead, you may direct that they stay in your trust, managed by your individual or corporate trustee, until your beneficiaries reach the age(s) at which you want them to inherit.

The successor trustee must follow your trust instructions

Your successor trustee (as well as your primary trustee if it is not you) is a fiduciary — that is a legal term meaning that he/she/it has a legal duty to follow the living trust instructions and to act in a reasonably prudent manner. The trustee must treat the living trust as a binding legal contract, and must use "best efforts" to live up to the obligations of the contract. If your successor trustee mismanages the trust by ignoring the instructions in your living trust, he/she/it could be legally liable.

Conclusion

As you have seen, wills and living trusts are a must for any comprehensive wealth protection plan. They are truly the estate-planning "building blocks." If you do not have such documents in place yet, you should remedy this problem as soon as practicable.