Estate Planning 101 – Wills and Trusts

While most people don’t get excited about the idea of estate planning or setting up wills and trusts, it’s an important task that’s better started sooner rather than later, especially given the common complexities of finances and family dynamics. Having an estate plan in place ensures your property and assets are distributed according to your wishes, and it saves time and headaches for your loved ones later.

What does ‘estate planning’ entail?

Essentially, estate planning is simply the process of creating a clear plan that spells out how your assets and affairs will be handled after your death, or if you become unable to manage them on your own. It can be a complicated process, depending on your financial situation and the number of your beneficiaries, which is why it’s so important to start planning as soon as possible. You can always revise your plans as your life situation changes.

Wills vs. trusts – What’s the difference?

A will is a legal document that lays out where and to whom your assets will be distributed after your death. Wills must be signed and witnessed according to state law, and filed with a probate court (making them public record). Wills name an executor, who executes the terms of the will and manages the distribution of assets. A will can also direct an executor to create a trust and appoint a trustee to manage assets intended for another beneficiary, such as minor children or individuals with special needs. A will also allows you to disinherit a spouse, child or other dependent, but disinheritance provisions must comply with state laws.

Trusts are legal arrangements that direct the transfer of your assets to a trustee, who manages distribution to your named beneficiaries. Wills take effect only upon death, while trusts can be used during life or after death. Unlike wills, trusts do not involve probate court, and can thus be private. They can also be created after death, what’s known as a “testamentary trust,” as another way to carry out the terms of a will.

Depending on your intentions for how your assets are distributed, there are a few types of trusts to choose from:

Revocable Trust: A revocable trust can be altered, amended or terminated at any time during the grantor’s lifetime, and the grantor can also serve as the trustee and continue as the owner of trust assets for tax purposes. Assets in a revocable trust are handled outside of probate. Because the grantor maintains control over the assets while living, those assets are included in the taxable estate.

Irrevocable Trust: In this situation, grantors relinquish the ownership rights to their assets, and the trust is managed by an independent trustee. Any income from the trust assets are not included in the grantor’s taxable income and are not included in the estate. This can be used to prevent assets from transferring to a grantor’s creditors if set up correctly.

Charitable Trust: Irrevocable trusts that benefit charities can result in tax benefits for the grantor, as well as some economic returns. These must be set up in accordance with current tax laws, and supply regular support to the charity beneficiaries. There are a couple of ways to structure charitable trusts, depending on the needs of the grantor and charity, so it’s best to consult with financial and legal professionals to find the right structure that suits your situation and interests.

Special Needs Trust: These are legal arrangements to provide economic support to individuals with disabilities without compromising their eligibility for federal and state public assistance programs. Special needs trusts must comply with complex federal and state law requirements, and legal consultation is strongly encouraged to ensure proper setup without hurting the beneficiary’s public assistance.

Do you need a will, a trust, or both?

While this generally isn’t an either/or scenario, at the bare minimum, you definitely need a will. If you die without a will, the management and distribution of your estate and debts, as well as the care of any minor children or other dependents will be handled by an administrator appointed by the probate court. While a state’s intestacy law will generally allocate the majority portion to a surviving spouse and divide the remainder among any children, there will be no consideration for any factors that would have caused you to distribute your estate differently (like an estranged spouse or other heir).

A spouse or other adult relative may apply to the court to serve as an administrator when there is no will, but they may not succeed. Additionally, the process typically takes more time and can incur more fees that come out of the estate.

Having a trust without a will can also create problems when it comes to any assets not included in the trust, which will be subject to the intestacy laws as described above. Trusts and wills can complement each other, allowing for speedier asset transfers and preventing intestacy holdups. A will can also distribute assets that do not transfer automatically by creating a trust to hold and manage assets for designated heirs, such as children, until they reach maturity.

Bottom line, a will is always advisable if you want to control how your assets are distributed and want to avoid the complications of intestacy law. Whether or not you need a trust in addition to your will depends on your financial situation and your family structure, and your own preferences for managing and distributing your assets.

Getting started – the basic steps

Estate planning takes some time, and should be done with the assistance of tax, financial and legal professionals to create a thorough plan. Though every situation will differ, the basic process is as follows:

Inventory your assets: cash, cars, clothes, jewelry, real property, investments, savings, retirement accounts, artwork, etc.
Identify your family’s needs and what assets will see to those needs.
Determine your directives – how, where and when you would like your assets distributed.
Name your beneficiaries, as well as any biological or legal heirs you might disinherit.
Look up your state’s estate tax laws and understand how they affect your plans.
Consult with financial, tax and legal professionals to ensure everything is correct and compliant with state laws.
Make a plan to periodically review and update your will and any trusts, especially as your children grow older or relationships with an executor or trustee evolves over time.

Beyond wills and trusts – other common estate plan documents

Wills and trusts are what people typically think of with estate planning, but the process is much more robust. There are other documents and considerations that go into creating a thorough plan:

Guardianship: If you have minor children, you’ll need to include instructions for their guardianship. This is typically a section of the will.
Financial Power of Attorney: This is a legal document that allows another person to handle your financial affairs.
Durable Power of Attorney: This document allows another person to handle your non-health or non-medical affairs should you become unable to do so on your own.
Advance Healthcare Directive (AHCD): Also known as a “living will” or a “medical power of attorney,” this document lays out the medical actions that should be taken if you become incapacitated and cannot make your own medical decisions. Though the terms are used interchangeably, there are some difference between them:
- Living Will: Specifies your medical preferences regarding end of life decisions or life support
- Medical Power of Attorney: Designates someone else as legally able to make healthcare decisions for you if you cannot make them on your own.
- Advanced Healthcare Directive: Combines the instructions of the living will and medical power of attorney.
HIPAA Authorization: This is your consent to share your medical records and information with an authorized third party.

You’re not in this alone.

The experienced estate planning attorneys at Hackstaff, Atkinson, Snow and Griess are here to help you navigate the process. From wills and trusts to estate taxes and more, we can guide you through the process and ensure that your assets and interests are protected, both for you and your future beneficiaries.