This month, we will continue our discussion of estate planning techniques. Last time, we reviewed the differences between Per Capita and Per Stirpes designations. Those designations are important, but they are not the only estate planning tool you need to be aware of.
What if 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 on the beneficiaries? The answer to both of those questions is usually either a Will or a Trust.
Below, we will discuss the positives and negatives 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 from a high-level perspective. 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 referrals that would be more than happy to answer any questions you may have.
What Is a Will?
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 typically 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 or directions as to how you would like your assets transferred to your heirs.
Advantages and Limitations 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, 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 can be 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.
Why a Trust Might Be Right for You
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.
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 room for 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 can sometimes be the better option over a will.
Financial Planning and Review Meeting
If you have any questions about your investment portfolio, tax strategies, our 401(k) recommendation service, or other general questions, 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.
Sincerely,
Zachary A. Bachner, CFP®
with contributions from Robert Wink, Kenneth Wink, and James Wink
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