While it can be easy for people to back-burner estate planning due to busy schedules or thinking they have plenty of time to get around to it, doing so can result in property and financial assets passing to unintended heirs in unintentional ways. Without the proper planning, your heirs could spend years in probate sorting out your assets—and wind up with a hefty tax bill at the end of the process.
The key to maintaining control of your assets, avoiding probate, and minimizing estate taxes is to plan now. Often, people believe that estate planning only benefits the very wealthy, but nothing could be further from the truth. It’s something we believe everyone needs to engage in regardless of age, estate size, or marital status.
If you have a bank account, investments, a car, a home, or other property, you have an estate. More importantly, if you have a spouse, minor children, or other dependents, an estate plan can be critical for safeguarding their interests and their future income needs. That’s where wills and trusts come into play.
Do I Need a Will or Trust?
In many cases, you may need both a will and a trust. A will helps to ensure that property is passed according to an individual’s wishes and is drafted according to state laws. Trusts can be valuable in limiting estate taxes and legal challenges and specifying how and when property is distributed, according to your wishes.
A will helps to:
- Distribute your possessions as you wish.
- Appoint and outline powers of an executor/personal representative.
- Appoint a guardian for minor children.
- Specify funeral wishes.
- Expedite the legal process.
- Reduce stress and heartache for loved ones.
The Role of the Executor
Your executor (or personal representative) is the individual or company named in your will to carry out the duties of administering your estate and distributing estate assets, including investment assets and property (real estate, automobiles, household items, collectibles, etc.) in accordance with your wishes and instructions following your death. The executor is also responsible for making or overseeing funeral, burial, or cremation arrangements and paying for these expenses with estate assets.
While these duties may sound onerous, keep in mind that executors also have the authority to enlist the help of professionals to reduce their burden, including financial, accounting, legal, and real estate professionals.
When Is a Will Not Enough?
While a will is an important estate planning tool, it is not designed to offer certain legal protections available through a trust. One key difference between a will and a trust is that a trust can include an incapacity clause, stating who you want to manage your affairs if you are unable to do so during your lifetime.
While a will can determine who may receive your assets outright, a trust provides the opportunity to designate how and over what time period or at what age your property or assets may be dispersed to heirs. This can be very important when beneficiaries are minors, or if you want to place specific parameters on the amount of assets adult heirs may access over a given time period. Trusts can also be used to help with proper management of your assets during your lifetime.
What Is a Trust?
A trust is a formal legal document used to communicate your instructions for the management of all or part of your property and describes:
- How you want your assets to be managed and, eventually, distributed.
- Who you want to benefit from your assets now and in the future.
- Who you want to be responsible for carrying out these instructions (the “trustee”).
For most people, the primary objective in establishing a trust is to help ensure assets are legally protected, managed, and distributed in accordance with their wishes when they are no longer able to do so themselves due to incapacity or death.
A trust falls into one of two categories:
Revocable/Living Trust: A revocable or living trust can be modified or terminated during your lifetime. You control the trust, and any earnings generated by assets held in the trust are reflected on your personal income tax returns. You may manage financial assets held in the trust or hire a financial advisor to manage your assets under your supervision and in accordance with trust provisions. A revocable trust can also be used to transfer assets at death (similar to a will), but, unlike a will, trusts are not subject to the court-supervised probate process. Once you pass away, your wishes are final and the trust becomes irrevocable.
Irrevocable Trust: As a rule, an irrevocable trust cannot be modified or terminated (before or after your death) without court approval. An irrevocable trust is a separate legal entity and its own taxpayer. While the concepts of an irrevocable trust may initially sound stringent, irrevocable trusts can allow significant flexibility. Irrevocable trusts set up before death are often used to hold life insurance policies, gifts of assets to be made available to beneficiaries at a future date, or funds for future charitable donations.
All trusts, whether revocable or irrevocable, involve three parties with distinct roles and interests:
- Grantor/Settlor: The person(s) creating the trust (you, or you and your spouse).
- Trustee: The person(s) or institution you appoint to be responsible for the trust in the event of your incapacity or death.
- Beneficiary: The people or charities (current and remainder) that benefit from the trust.
Understanding the Role of a Trustee
The trustee’s role is to administer and distribute the assets in the trust according to your wishes, as expressed in the trust document. Trustees have the fiduciary duty, legal authority, and responsibility to manage your assets held in trust and handle day-to-day financial matters on your behalf.
They are required to perform a broad range of duties, from making difficult decisions and judgments related to distributions and legal interpretations, to recordkeeping, reporting, accounting, initiating transactions, managing trust assets, filing taxes on behalf of the trust, and more.
When naming a trustee, it’s important to consider the complexities of the trust and whether the trustee you select has the time, knowledge, expertise, objectivity, and desire to assume the important responsibilities that accompany this role.
Getting Started Can Be Easier Than You Think
For many people, getting started can be the toughest step in the estate planning process—but it doesn’t have to be. One of our financial advisors can walk you through how estate planning, wills, and trusts fit into your overall financial plan.
This article is not intended to provide specific legal, tax, or other professional advice. For a comprehensive review of your personal situation, always consult with a tax or legal advisor.
