Estate planning is one of the most commonly overlooked areas of financial planning. This month we will continue our discussion of estate planning techniques. If you have been following our blog postings, you may recall the distinction between Per Capita and Per Stirpes designations. Those designations are important, but they are not the only tools you need to make the most of your estate planning. Suppose you have an asset that does not allow you to list a beneficiary (i.e. house, car, personal property, etc.)? Or what if you want to impose specific rules or limitations for the beneficiaries? In most cases the solution is either a will or a trust.
Will vs. Trust: What’s the Difference?
Today we will be covering the pros and cons of using a will and a trust. There are many types of wills/trusts out there so we will only be discussing these two vehicles at a high-level view. If you would like to explore these options in more detail, please contact us directly or speak to your estate planning attorney. If you do not have an existing attorney relationship, we have trusted referrals that would be more than happy to answer any questions you may have.
What is a Will?
A will is a legal document that expresses a person’s wishes as to how their property is to be distributed after their death and as to which person is to manage the property until its final distribution.
When someone mentions getting their final wishes in order, they typically are referring to a will. We see that more times than not, if somebody has estate planning documents, they have a will. This is because a will applies to a broader range of individuals and it is usually the cheapest option. In the simplest form, a will is used to leave behind your wishes and may include directions as to how you would like your assets transferred.
Understanding the Basics of a Will
A will may include instructions to divide up monetary assets, who should be receiving the home and whether it could be sold to other beneficiaries, guardians you would prefer for minor children, and so on. Any wish you may have at your death can be included in your will. Wills are very customizable, since sometimes they are specific and lengthy while others are short and straight to the point A will can be crafted to fit your unique situation.
However, it is possible that not all of your wishes will be handled correctly because of the limitations of a will. This is because a will is only a set of instructions you give to a probate judge. The judge has the ultimate final say as to what will happen. Probate is by far the biggest downside to a will. Not only is the process expensive and very time consuming, but a will can be contested by your heirs. This means that your children may explain to the judge why they believe they should receive all of your assets instead of your spouse. We often joke that probate is when your distant third cousins will come out of hiding and try to stake their claim on your estate. And if they are persuasive enough, the judge may rule in their favor and disregard the wishes laid out in your will.
What is a Trust?
A trust is a much more complex vehicle than a will and usually is much more expensive. Because of this, we see that those who have more assets are typically the ones to pursue a trust. While a will is just a set of instructions, a trust is actually a legal entity that will own the assets. A trust is normally accompanied by a set of instructions as well to inform the Trustee, or controller of the assets after your death, as to how you would like the assets to be distributed. These instructions allow you to dictate who receives an inheritance, when they will receive it, and how much they will receive. You cannot control the timing of the inheritance with a will, and this is especially important when a child or grandchild would benefit from not receiving all the assets at once.
Understanding the Basics of a Trust
The biggest advantage to a trust is that it will bypass probate. This means that your trustee is required by law to follow the instructions within the trust. There is no probate cost, no argument between who receives what, and no lengthy delays in the asset distribution. As long as you can trust your designated trustee, you will not need to worry about your assets after death. They will be distributed exactly how you have laid out in the trust instructions.
There are a variety of trusts that can be used to limit taxation, limit control, and even designate certain benefits for charity. As a separate entity, trusts may need to pay income tax on any growth of the assets within it. The assets may also be used to pay final expenses or any fees incurred by the trustee upon your passing. For those who can afford it, a trust is usually the better option over a will.
If you have any questions about taxes, your individual investment portfolio, our 401(k)-recommendation service, or anything else in general, please give our office a call at (586) 226-2100. Please feel free to forward this commentary to a friend, family member, or co-worker. If you have had any changes to your income, job, family, health insurance, risk tolerance, or your overall financial situation, please give us a call so we can discuss it.
We hope you learned something today. If you have any feedback or suggestions, we would love to hear them.
Zachary A. Bachner, CFP®
with contributions by Robert L. Wink, Kenneth R. Wink, and James D. Wink.