Estate Planning 101 (Part 1)

Key Points

  • Wills and Trusts are useful Estate Planning tools, but each serves a different purpose.
  • A Will is useful for outlining your wishes, but the amount of protection it provides can be incomplete.
  • A Revocable Living Trust (as opposed to a Will) can help ensure that your Estate avoids lengthy and costly probate measures.
  • A Trust can administer assets for minor beneficiaries without court intervention, while also providing useful protection against creditors.

Wills and Trusts are common terms, but they do not mean the same thing. Each has its own use and purpose, but improperly substituting one for the other can leave your Estate in hot water.

What’s the BIG deal with Estate Plans?

Having a comprehensive estate plan in place can help you feel more confident about the future and that your loved ones will be taken care of. It can help you achieve a variety of goals and objectives, including:

  • Providing support and financial stability for your spouse.
  • Preserving assets for future generations.
  • Supporting a favorite charity or other worthy cause.
  • Ensuring all of your assets, including those that pass by beneficiary designation (e.g., retirement accounts and life insurance policies), will be distributed according to your wishes.
  • Minimizing taxes and expenses.
  • Ensuring that individuals you choose can make decisions on your behalf in the event of your incapacity.

It’s important to have an estate plan. You want to make sure the assets you’ve worked so hard to accumulate during your lifetime go to the people or organizations you care about. Estate planning
can be a complex process, but you can make it easier with the support of capable, experienced professionals (Source: Vanguard).

Will First

A Last Will and Testament is a legal document that outlines the wishes for the administration and division of an estate after passing.*

Trust Later

A Trust is a fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries. It is a legal document that is traditionally used for avoiding probate and minimizing estate taxes (see Part 3). Like a Will, a Trust outlines the wishes for the administration and division of an estate plan.

Differences Between a Will and a Trust

Probate

A Trust can be used to avoid probate, a Will cannot.
Probate is the process of changing the title on assets when someone passes away. Assets that are owned in a deceased person’s individual name and for which there is no named beneficiary, are no longer accessible once the owner of the asset has died.

In order for family members to gain access to accounts or other assets in the deceased’s individual name, they must file a petition with the probate court and wait for the court to approve the Will and appoint the Personal Representative. This can be a long and costly process during which bills cannot be paid and assets cannot be managed.  

A Trust is an excellent tool to avoid probate because assets that are owned in the name of a Trust are immediately accessible to the trust-maker’s designated successor.

Creditor Protection

A Trust can provide creditor protection for the inheritance you leave to beneficiaries, a Will cannot.
Many people worry that the inheritance they leave to their children will be lost to their children’s creditors such as a divorcing spouse, unpaid credit card bills, a bankruptcy, a business loss, or a lawsuit. Sadly, this is often the case when assets are distributed to beneficiaries via a Will.

A Trust allows the maker to safeguard an inheritance from the reach of the beneficiaries’ creditors by keeping the assets out of the name of the beneficiary. Ownership of the assets remains in the Trust. The beneficiary will have access to the assets in accordance with the directions you leave in your Trust. You may also allow your beneficiary to serve as a Trustee, allowing the beneficiary to manage her own inheritance.

By leaving assets to your beneficiaries via a Trust rather than outright via your Will, you can ensure that the assets you worked so hard for will be available to your children and future generations.

Special Needs Protection

A Trust can protect governmental benefits for a person with disabilities, a Will cannot.

If you have a child, grandchild, or other beneficiaries with disabilities, then a Trust is a must. If you leave assets to a person who receives needs-based governmental benefits via your Will, it will place your beneficiary in the difficult position of either losing those benefits or transferring the inheritance into a Trust of which the state must be the beneficiary at the beneficiary’s death.

Unless the inheritance you are leaving is so significant that the monetary and medical benefits available to the person through programs such as Social Security and Medicaid are no longer important, then making sure that those governmental benefits continue to be available is vital.  

Leaving assets to a person with disabilities via a Trust is the best way to ensure those governmental benefits are preserved and that the inheritance you leave will be available to pay for expenses that are not covered by these governmental benefits.

Estate Taxes

Trusts can reduce estate taxes, a traditional Will cannot.
For married couples, including same-sex married couples, the use of a Trust in their estate plan can significantly reduce or even eliminate both federal and state estate taxes assessed against their estates. More on this particular topic in Part 3.

Assets for Minor Children

A Trust can administer assets for minor beneficiaries without court intervention, a Will cannot.
Leaving money directly to a minor creates an administrative nightmare because the law provides that a minor does not have the legal capacity to receive assets. The parent of the minor also does not have the ability to act as the child’s legal representative until the court says so.  

As such, if you die with a Will that leaves money to minor beneficiaries, the court will need to appoint a Conservator to receive that inheritance for your children. The Conservator will be required to report annually to the court and the court will appoint an overseer (guardian ad litem) to make sure the Conservator is doing his or her job for your minor beneficiaries. This means huge costs and long delays in administering funds for minors. It also means that when the minor turns 18, he or she will be entitled to receive all of those assets and will be free to do with them as he or she wishes (think fast cars, spring break, and lots of shopping).  

Creating a Trust to receive assets passing to a minor, or even to a young adult beneficiary, is the best way to ensure that the court is not involved in the process, that the person you want to manage assets for the beneficiary is able to do so, and that the beneficiary can use the assets only for purposes you decide are important and/or at ages that you dictate.

If some of the Estate Planning terminology that we’ve covered thus far is starting to get confusing, check out Part 2 for some clarity into all this.

Need More Help?

At Investing Forever Advisory, we have Will and Trust Packages, as part of our Estate Planning Service. But you don’t have to make the decision on your own. Your estate planning session starts with a series of questions specifically designed by our attorneys. Your answers to these questions give the attorney the information they need to make a document recommendation.

If you’re ever in need of guidance, these blog posts may be of help. But be sure to contact a financial, tax, or legal professional for guidance and information specific to your individual situation. And as always you can reach out to me directly here with questions or concerns about your personal situation.

Finally, if you want to see how your risk appetite stacks up, check out my free risk assessment here.

The End.

* Blog content used with permission from EPNavigator.com.

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