One of the biggest reasons people avoid estate planning is the anxiety we may experience considering life after we die. It’s a hard concept to contemplate for practically everyone.
As unpleasant as considering our own mortality might be for us, thoughtful estate planning can be a great gift to your family. A well thought-out and executed estate plan could serve to promote unity after you’re gone, while a poorly-constructed or absent estate plan can create ambiguity over the transfer of your assets, leading to tension and fissures within your family.
This week’s MoneyDo prompts you to consider giving the gift of organization and unity to your family. One of the first decisions you’ll need to make is whether you should write a will or create a revocable living trust. Which is right for you? Your MoneyDo: Understand the difference between a trust and a will.
How A Will Works
A will is a legal document describing – in detail – which of your heirs will receive property or specific assets after your death.
- Only assets held in your individual name without a beneficiary or joint owner are distributed under your will.
- When you die, the will’s named personal representative will present the will in probate court, opening an estate proceeding.
- Estate proceedings are public in nature, often done under the guidance of an estate attorney, and can be costly, and time consuming.
- Anyone who feels they have an interest in your estate may contest your will.
Because a will only passes assets in your individual name, you can use joint ownership and/or beneficiary designations on various assets in an effort to eliminate the probate proceeding. However, we recommend exercising caution when doing so, as it may add complexity at your death when you have multiple heirs becoming co-owners of property.
How a revocable living trust works:
A revocable living trust is different than a will. A revocable living trust’s major benefit is that your assets will transfer outside of probate, so public notice is not required and the ability to contest your wishes is diminished.
An overview of the revocable living trust basic structure:
- A revocable living trust is a legal entity created to hold your assets during your life, while you will serve as trustee – thus having complete control.
- The trust will name a successor trustee that will take over once you die or are unable to manage your affairs.
- In most instances, many of your financial assets will be “retitled” in the name of the trust or payable to the trust at your death.
- Since you still own all the assets in the trust, there are no tax benefits or consequences to retitling assets.
- At any point you may choose to dissolve or change the terms of the trust (hence the term “revocable”).
- At your death the trust becomes irrevocable therefore the successor trustee must follow the existing language in the trust.
Although likely more expensive to create, for larger estates, a revocable living trust is a more cost-effective plan, in the long run. A revocable trust can also dictate when assets are transferred. For those of us with younger children or a disabled child, a revocable living trust allows assets to remain in the trust under the guidance of a successor trustee, which can often be better than handing over a check.
Which is best?
We generally believe a will is more than adequate for smaller estates, since probate expense will likely be less. For larger estates, individuals with real estate outside their state of residence, or if you feel the need to control how or when assets are received, then a trust might be a better option.
No matter whether you are leaning towards a will or a trust, it’s imperative to engage an estate attorney to create a well-executed estate plan that properly coordinates all of your assets in a consistent and tax-efficient manner. Trust us when we tell you: this is one of the best gifts you can give your family.
