Will vs. Trusts: Estate planning simplified
Estate planning is often considered a complex, overwhelming, and misunderstood topic. Many people believe it's a concern reserved for the wealthy elite, but in reality, it's a critical process that every individual and couple should undertake. It's about ensuring that your hard-earned assets and wishes are protected and passed on to your loved ones. People are often unaware of various aspects of estate planning that can have a significant impact on their financial well-being and the future of their loved ones. In this blog, we will demystify estate planning for the average person or couple, discussing the fundamental components: Wills and Trusts. We will also highlight replies from a QA we ran with two attorneys who specialize in these services. Huge thanks to Lydia Mosser and Tali Klapach for answering our questions and sharing insights with us.
Understanding Estate Planning
Estate planning is the process of preparing for the distribution of your assets after you pass away or become incapacitated. The primary goals are to protect your wealth, minimize taxes, and ensure your wishes are respected. The two most common instruments used in estate planning are Wills and Trusts.
When creating a Will or Trust, there are several essential documents involved, each serving a unique purpose:
Advanced Medical Directive or Living Will: A document that outlines your healthcare preferences, including end-of-life decisions, in the event you become incapacitated.
Power of Attorney: This document designates someone to make financial and legal decisions on your behalf in case of incapacity.
Healthcare Power of Attorney: Similar to a Power of Attorney, but specifically for healthcare decisions.
Living Trust Agreement: The central document that establishes the trust, names trustees and beneficiaries, and will indicate how your property will be distributed after you die and who will manage that process.
Quit Claim Deed: This transfers your real estate to your trust.
HIPAA Waiver: Allows your healthcare information and records to be disclosed to certain individuals.
Last Will and Testament: As discussed earlier, a Will outlines asset distribution and other essential matters. You may choose to have a Pour-Over Will, which is a companion document used in conjunction with a living trust to catch any assets not transferred into the trust during your lifetime.
Ask an estate attorney:
Question: What is the most common misunderstanding people have about estate planning?
[Tali}: The most common misunderstanding that people have is that this is a one-and-done process. But estate planning is not a one-time transaction. Your estate plan needs to be updated to reflect changes in your life-marriage, death, divorce, new job, new assets. Although the bulk of the work is done at the start of the process, you need to update your estate plan every few years or it may be obsolete.
[Lydia]: The most common misunderstanding about estate planning is that it is only for wealthy people. But the truth is that most people can benefit from creating an estate plan, especially if you own real property or if you have minor children. In California, an estate with assets over $184,500, will be probated on your death unless you have a trust in place. Assets include bank accounts, stocks and bonds, furniture, cars, jewelry and the “fair market value” of any real estate owned by you. Because California real estate prices are so high, most real estate will be subject to probate unless it is held in a trust, joint tenancy, or as community property with right of survivorship. If you have children, it is important to set up an estate plan because you want to be able to decide who will care for your children in your absence and to ensure that your assets are preserved for the benefit of your children. Even if you have a small estate, it is important that you designate someone to manage your assets and make health care decisions for you, in the event that you are incapacitated…
Wills
A Last Will and Testament, commonly known as a Will, is a legal document that outlines how your assets should be distributed upon your death. Here's what you need to know about Wills:
A Will specifies who will inherit your assets and how much they will receive. It's often used to name beneficiaries, designate guardians for minor children, and distribute personal belongings. You can appoint an executor in your Will. This person is responsible for ensuring your wishes are carried out and the estate is distributed as per your instructions. When you pass away, your Will goes through a court process called probate, where it's verified and executed. This process can be time-consuming and costly. During your life, you can revise your Will at any time if your circumstances change.
While a Will is a fundamental estate planning document, it's only one piece of the puzzle. Other documents like Trusts, powers of attorney, and healthcare directives play crucial roles in comprehensive estate planning.
When to create a Will?
When you are a young adult: Even if you're just starting your adult life, having a basic Will can be important. It allows you to designate beneficiaries for your personal belongings and assets.
Parents with Minor Children: If you have children, a Will is essential for naming guardians who will take care of your children if you and your spouse are unable to do so.
Modest Estates: For individuals or couples with smaller estates, a Will might be sufficient to outline the distribution of assets and property. What a smaller estate means actually varies by State, so we’d recommend referencing your state guidelines surrounding probate laws.
End-of-Life Wishes: If you have specific preferences for your funeral or end-of-life decisions, a Will is a place to outline these desires.
Wills can be updated relatively easily, making them suitable if you anticipate frequent adjustments due to changes in your circumstances.
What Happens if You Die Without a Will?
What happens if a loved one dies without a Will? Unfortunately, most people are bound to find out the hard way, as two-thirds of American adults have no Will, according to a recent Caring.com study. If you die without a Will, your state's laws of descent and distribution will determine who receives your property by default. These laws vary from state to state, but typically the distribution would be to your spouse and children, or if none, to other family members. There is great uncertainty around what the courts will decide in the absence of a Will. Some say that the state will use a default of what they have decided over the years based on what has happened in past court cases to divide up your assets, which may not reflect your actual wishes.
Ask an estate attorney:
Question: What are other estate planning aspects that can be missed or can make it easier on beneficiaries after the Grantor has passed?
[Tali]: Other than preparing a comprehensive estate plan, it is helpful to have a team in place that can guide your beneficiaries after you die-financial advisor, estate planning attorney, CPA, etc.
[Lydia]: Without a plan in place, a court will decide these things for you and may make decisions that you would not have wanted. Having a well thought out and documented estate plan can also mitigate family infighting and disputes after your death. If you have elderly parents or grandparents, it is also important to keep in mind that legal documents cannot be executed by a person who has dementia or lost mental capacity in some other manner. Therefore it is crucial to ensure that your parents have their estate plan in place and they have signed a power of attorney and healthcare directive authorizing someone to sign documents and make legal and medical decisions on their behalf.
Trusts
Ask an estate attorney:
Question: What are the benefits or advantages of a living trust?
[Lydia]: The main benefits of having a living trust are being able to control the administration and distribution of your assets after death, create a plan to care for your minor children while protecting their inheritance if something should happen to you, and avoiding probate. Probate can be a long and drawn-out process that may take years… Probate can also be costly. Legal fees, executor fees and other costs must be paid first before your assets can be fully distributed to your heirs. Further, unlike trust administration which is private, probate proceedings are matters of public record. This means that anyone can see what you owned and who will receive your assets.
[Tali]: The main benefits of a living trust are the avoidance of probate, and all its attendant fees and costs, and the privacy of your estate plan (probated wills are public!).
Background
A Trust is a legal arrangement and entity, where one party (the Trustee) oversees assets for the benefit of another (the Beneficiary), according to specific terms and conditions set by the Trust creator (Grantor). Sometime Trusts offer more flexibility and control than Wills, making them a popular choice for estate planning.
A Living Trust is created during your lifetime and allows you to manage your assets while alive. It can continue to operate after your passing. Assets held in a Living Trust do not go through probate, ensuring a faster and more cost-effective transfer of assets to beneficiaries. Trusts offer greater control over when and how your assets are distributed. They also maintain privacy, as they aren't part of the public record. Trusts can include provisions for managing your assets if you become incapacitated, ensuring a seamless transition of responsibility. Trusts can provide a level of protection against creditors and legal claims.
There are two main types of living trusts, which both offer advantages.
A revocable living trust is the most commonly used Trust for estate planning purposes because it allows you to maintain control over the Trust and make changes during your lifetime. This means you can add or remove assets, change beneficiaries, or even revoke the Trust entirely if you wish. But because you still retain control over the assets in a revocable Trust, they’ll be considered part of your estate for tax purposes. When the assets get distributed, your beneficiaries must pay estate taxes.
An Irrevocable Living Trust cannot be changed or revoked once created. When you transfer ownership of the assets to the Trust, you give up control over them, and you must appoint a third party as the trustee. Irrevocable Trusts are primarily set up for estate and tax considerations. That's because it removes all incidents of ownership, removing the Trust's assets from the grantor's taxable estate. It also relieves the grantor of the tax liability on the income generated by the assets.
When to create a Trust
You Have High-Value Assets: Trusts are often recommended for individuals or couples with significant assets, as they offer more control and efficiency in asset management and distribution.
Asset Protection: If you're concerned about protecting your assets or your home from potential creditors or legal claims, a Trust can provide an additional layer of protection.
You Own A Business: Trusts can protect others from business debts, and relieve the tax burden on your estate.
Privacy Concerns: Trusts maintain a high level of privacy since they are not part of the public record, making them an attractive option for those who value discretion.
Incapacity Planning: Trusts can include provisions for managing your assets if you become incapacitated, ensuring a seamless transition of responsibility.
Complex Family Dynamics: If your family situation is complicated, involving multiple marriages, stepchildren, or estranged relatives, a Trust can help you navigate these complexities and ensure your assets are distributed as you wish.
Avoiding Probate: If you wish to spare your loved ones the time and expense of probate court, a Trust is a valuable tool as it bypasses this process.
Ultimately, the right time to create a Will or a Trust is when you are ready to protect your assets, secure your legacy, and ensure that your loved ones are cared for according to your wishes. Consulting with a qualified attorney experienced in estate planning can help you make the right decisions based on your specific needs and goals.
Creating an estate plan: comparing Wills & Trusts
Estate planning is not a one-size-fits-all process. The decision to create a Will or a Trust depends on your individual circumstances and goals.
Additional Considerations in Estate Planning
Funeral Planning Declaration: allows you to specify your wishes as far as the disposition of your body and the services.
Make a list of all banks and investment institutions with account numbers, lists of credit cards, utility accounts, etc. Leave clear instructions as to how and when these things are paid.
Digital Assets are Part of Your Estate: In the digital age, your online accounts and assets need to be considered in your estate planning. This includes social media accounts, email, digital photos, cryptocurrencies, credit card points and more. So make sure someone can find your Apple ID, bank ID account logins, and passwords. Proper planning can help your loved ones access and manage these assets when you're gone
Make sure your heirs know where your life insurance policies are located.
Make sure you have titles for all vehicles, campers, etc.
It's important to remember that estate planning is not a one-time endeavor. As life circumstances change, so should your estate plan. Major life events like marriage, divorce, births, deaths, changes in assets, or moving to a different state can all necessitate updates to your estate plan. Regular reviews and updates to your Will or Trust are essential to ensure they accurately reflect your current wishes and financial situation. Importantly, assets with beneficiary designations, such as life insurance policies and retirement accounts, typically pass directly to the named beneficiaries outside of probate. It's essential to review and update these designations regularly to ensure they align with your current wishes.
Estate planning is not just for the wealthy; it's a critical process that every individual or couple should consider. Wills and Trusts are essential tools in this process, each with its advantages and limitations. While Wills provide a straightforward way to outline your basic wishes, Trusts offer more control, privacy, and flexibility. When it comes to estate planning, the key is to consult with a qualified attorney and your financial advisor who can help you determine the best strategy for your unique situation and ensure your wishes are upheld. It's not just about protecting your assets; it's about securing your legacy and ensuring your loved ones are taken care of when you're no longer around.
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Jordan Johnson is Mana’s Operations Associate. Mana FLD provides comprehensive financial planning and investment management services to help clients grow and protect their wealth throughout life’s journey. Mana FLD specializes in advising ambitious professionals who seek financial knowledge and want to implement creative budgeting, savings, proactive planning and powerful investment strategies. Jordan has her insurance producer license. When she’s not working, Jordan loves spending time with her puppies Murphy and Mia.