In Part 1 we discussed the importance of setting up your advanced directives. Specifically, your power of attorney, health care proxy, and living will. This is the foundation of your estate plan, and important for everyone to have in place. Once this initial phase of your estate plan has been discussed and planned for, the next step is to decide whether you will need a will, a trust, or both.
As an attorney when asked – “what do I need?” The answer to this question is “it depends.” Yes, I know – a typical “attorney answer.” This may be a frustrating answer for some, but estate planning is not as simple as applying a cookie cutter approach to every individual and every situation. Everyone has different goals, a different estate, assets, and family circumstances. In Part 2 we will look at the mechanics of wills and trusts, the differences between both, as well as the pros and cons that you should know before speaking with an attorney.
Probate vs. Non-Probate Assets
One of the first things to do when thinking about creating a will or a trust is to organize all assets. You cannot have an adequate estate plan if you do not have a grasp on the estate for which you are planning for. Make a list of probate assets and a list of non-probate assets.
Probate is the process in which a court will validate your will, and determine that it is in fact your last will and testament. Depending on your estate, and the documents that you create for your estate plan, some estates may be able to avoid this process altogether. Probate assets are property that is solely owned, that lack any type of beneficiary designation, such as cars, jewelry, antiques, and other valuable possessions. These are assets that typically pass through a will. Passing these assets to the person designated in the will takes longer because the probate process must be commenced to determine the validity of the will first. We will discuss the probate process and what it entails more in depth in Part 3 of this estate planning series.
Non-probate assets are those that pass outside of probate. This includes retirement accounts that have beneficiary designations, taxable investments accounts that have transfer on death designations (TOD), bank accounts that have payable on death designations (POD), life insurance policies, and property that is owned jointly with rights of survivorship. Upon your passing, these assets pass to the designated beneficiary or co-owner without having to go through probate.
It is especially important in the initial stages of estate planning to name beneficiary designations on accounts that allow for it. By naming beneficiaries, you eliminate the need to plan for the distribution of those accounts in your estate planning documents. This can also help determine whether you need a will, a trust, or both, as well as the language that will be included in them. Named beneficiary designations will also take precedent over what is stated in a will. For example:
Tom named his sister as beneficiary of his 401(k)-retirement savings plan. 10 years later Tom decided to make an appointment to see an attorney to draft his will. A provision was made in the will specifically leaving Tom’s 401(k) to his brother. Tom never went back and updated his beneficiary designation on his 401(k) to reflect his most recent wish of it going to his brother. Tom passes away. Both siblings survive him. In this situation, Tom’s 401(k) would go to his sister.
Digital Estate Planning
In today’s age, it is also vital to think about your digital footprint. Tech companies are increasingly allowing for end-of-life planning by allowing users to share their passwords and account information with designated individuals after passing away. These are called digital-legacy contacts, and they provide easier access to a deceased person’s social media accounts. Digital-legacy tools allow the user to name a person who can access their accounts upon their death. This approach doesn’t give the designated person your password, but merely access to your account to be able to close it out.
The next step is to determine what you want your estate plan to accomplish. This is the fundamental question you need to ask yourself. For people in their earlier stages of life, they are generally concerned with who will take care of their children in the event something happens to them. As people progress further in their life cycle and careers those goals typically shift to asset preservation and long-term care planning. Whether to draft a will or a trust will depend heavily on what your individual goals are.
Wills & Trusts
A will is a document that allows you to spell out how you want your affairs handled and assets distributed after you pass on. The will does not take effect until you pass away, and the court has validated its authenticity through the probate process. A will allows you to appoint an executor to oversee the probate process and distribution of any probate assets. You can be as specific or general in stating who is to receive your probate assets after death. You can bequeath a certain possession to a certain individual, or you can leave your entire probate estate to one individual. A will also allows you to name guardians for minor children.
A trust is much different from a will. A trust is a fiduciary agreement whereby a grantor, the person creating and funding the trust, gives a trustee the right to hold and manage assets of the trust for the benefit of the beneficiaries. A trust takes effect the moment it is signed, as opposed to a will which is not affective until after the individual passes.
Assets within a trust will avoid probate, even if they are the probate assets we spoke about previously. Once a trust is created, it must be funded. This is the act of transferring certain assets into the trust.
There are various types of trusts that can be created. The right trust depends, again, on the goals that you have, and what you want your trust to do for you. At a high level there are revocable and irrevocable trusts.
A revocable trust allows the grantor to alter, amend, or terminate the trust at any time. It also allows the grantor to serve as the trustee, then name a successor trustee to take control of the trust when the grantor passes or becomes disabled. This type of trust is typically created for the purpose of avoiding probate, by putting probate assets into the trust. Since the grantor can retain control of the assets in the trust, they are included in the grantor’s taxable estate. As a result, this kind of trust is not set up for the purposes of long-term care planning. It will not shield your assets from the costs incurred if you need a nursing home or assisted living care.
An irrevocable trust requires the grantor to give up complete ownership of the assets that are transferred into the trust. The assets are not included in the taxable estate of the grantor, as the grantor does not have control or ownership of the assets. This can also help shield certain assets from potential creditor claims against the grantor and their estate. This type of trust is generally for people looking to discuss long-term care planning and asset preservation.
Creating a will is less expensive than a trust. When an individual is in their earlier stages of life and may not have a complex estate, a will may make more sense and be more cost effective. While a trust will cost considerably more, it ensures that probate assets will avoid probate and potential other assets are protected from costly long-term care facilities. When an individual is in their later stages of life and has built up a substantial estate, a trust may be worth the cost if asset preservation is an important goal. Unlike wills that go through probate and are made public, trusts remain private. At the end of the day, an individual should at the very least have some type of estate plan. Passing away without an appropriate estate plan and having probate assets may mean that the state intestacy laws will decide how certain assets are distributed if you do not provide for where you want them to go. This can be a stressful process for loved ones left behind who will be dealing with grief and final arrangement during this period of time.
Written by David Troiano, Esq.