As you begin estate planning, you will face difficult choices, further complicated by the current pandemic. However, it’s essential that you have a plan in place to protect your loved ones financially. There are many different ways you can do so.
Today, we’re going to discuss two of them. Wills and trusts are both estate planning tools, meaning they help you control who inherits your assets after you pass away. The similarities between the two end there, though.
It’s not as simple as choosing one or the other because wills and trusts tend to be interconnected. We’re going to cover the different types of both, as well as critical differences between the two, helping you decide whether a trust, will, or some combination of the two is the best choice for you.
A will is a document that outlines your wishes. It only becomes active after you pass away and can cover everything from which family members or charities you would like to leave your assets to, to appointing a guardian for any minor children you have. There are several types of wills you can choose from.
When you think of a will, the type that comes to mind is probably a testamentary will. A testamentary will is a classic last will and testament. It’s the most common type of will.
Anyone who has reached the age of majority and meets the definition of being of sound mind can make a will. The age of majority is 18 in every state except for Nebraska and Alabama, where it’s 19. Being of sound mind means you understand what’s happening around you, and you can make decisions for yourself.
That seems easy enough, right? If you know all of the necessary phrasing and vocabulary, it is.
Unfortunately, most people don’t. There’s a reason that jokes about legalese being a completely different language exist. If you draft a will, it’s a good idea to have an estate planning attorney or another professional look it over for you to ensure it’s valid.
Testamentary wills aren’t the only kind you might encounter. Three more are generally known, if not always recognized by state law. These are:
Each is unique and very different from a traditional last will and testament. It’s essential to be aware of state laws’ variations and prepare whatever type of will you choose accordingly.
It’s not what you’re thinking. As cool as it would be, a holographic will doesn’t involve holograms. While digital estate planning exists, it hasn’t quite progressed to that point yet.
In actuality, a holographic will is handwritten and signed by the person it belongs to. Some states don’t recognize holographic wills, and the existence of one will likely cause problems in probate court, which we’ll discuss later.
Oral wills are also called deathbed wills, and you’re likely familiar with them from movies and TV shows rather than real life. Oral wills are made verbally. The person making the will tells witnesses what their dying wishes are, and it’s up to the witnesses to attempt to get the will recognized.
Most states won’t recognize an oral will, although there are exceptions. If at all possible, it’s best to avoid the necessity of an oral will.
Pour-over wills are usually used with living trusts, which we will cover in more detail soon. With a pour-over will, you’re saying that any assets you haven’t already placed in the trust should go to it upon your death. At that point, they will be distributed to the trust’s beneficiaries.
Assets named in a pour-over will still need to go through probate court. However, the process is likely to be more streamlined as most assets will already be in the trust.
A trust is a way for you to arrange the transfer of your estate. There are three general parties involved in a trust: the trustor, the trustee, and the beneficiaries. You’re the trustor, the trustee is the person you appoint to manage the trust, and the beneficiaries are the people or organizations who will receive your assets after your death.
Many people name their children as beneficiaries. If you want to make sure your grandchildren are taken care of should one of your children pass away before you do, consider a per stirpes designation. This would mean your child’s share of your assets would go to their children rather than being divided equally among your remaining beneficiaries.
As with wills, there are multiple types of trusts. We’ll go over two of the most common.
Here is where the overlap between trusts and wills really begins. One or more testamentary trusts can be established in a testamentary will. Because of this, you may see a testamentary trust referred to as a will trust.
Testamentary trusts are irrevocable, which means that no one can change the terms without your beneficiary or beneficiaries’ permission.
Many people appreciate the sense of stability that testamentary trusts provide. You can appoint a professional as your trustee, so you don’t have to worry about how your assets are managed. A probate court will also check in occasionally to ensure the trust is being managed according to your wishes.
Testamentary trusts are popular choices for people whose beneficiaries are children or otherwise dependent on you. For example, you can state that your child can access funds from the trust to pay for their education until they reach a certain age, at which point they receive the remaining funds, and the trust will expire. If you have elderly parents, you may set up the trust to pay an in-home caregiver or nursing home.
It’s important to remember that the person you name as trustee can decline the position. If that happens, a court may appoint someone else.
We mentioned living trusts when we discussed pour-over wills. Unlike a testamentary trust, a living trust is created while the trustor is still alive. Living trusts are helpful if you want to avoid the money and time probate court is likely to consume.
Living trusts are revocable, meaning changes can be made during the trustor’s lifetime. While you no longer technically own assets that you transfer to a living trust, you continue to control them. For example, if you put your car in the trust, you can keep driving it.
Taxes are rarely straightforward, and those you may or may not incur when a living trust is involved are no exception. If the assets you have placed in the trust generate income, you will receive it, but it’s taxable.
You may or may not be subject to the estate tax. Due to its complexity and involvement with trusts, we’ll cover it in its own section next.
The good news is that very few Americans are subject to the federal estate tax. You only have to worry about it if your assets add up to be more than $11.7 million as of 2021. More good news: only your assets that exceed $11.7 million will be taxed, although the tax rate goes up to 40 percent depending on their total value.
In many cases, your estate won’t be taxed if it’s going to your spouse, regardless of what the value of your assets are. This provision is called the unlimited marital deduction.
Some states have their own version of the federal estate tax or an inheritance tax, although not many. Estate or inheritance taxes are becoming increasingly politically unpopular. Do your research or speak to a professional to discover if you’re located in one of them.
Are you concerned about the potential financial consequences of the estate tax? Set up a trust. A skilled financial professional can help you minimize the amount you pay.
There are seven key differences between wills and trusts, and you’ll want to consider all of them when you start planning your estate.
Your social and financial situation is unique, so some of these differences will matter more to you than others. We’re going to cover some of the more pressing concerns in greater detail.
Probate is a legal procedure. It involves a court overseeing the distribution of a deceased person’s assets. The term is often used interchangeably with probate court because most states have a specific court for probate.
We’ve mentioned probate court a great deal in this post, and you might be wondering whether it’s that big of a deal. The answer to that is both yes and no.
If you have a testamentary will that has been witnessed and includes all the right wording, going through probate court probably won’t cause many problems. While not necessary, you can sometimes speed the process by having your will notarized.
In most cases, it should take less than a year for your will to travel through the probate process. If there are any objections raised, business interests involved, or your estate is taxable, probate could drag on for longer.
If someone passes away without a will, meaning they died intestate, their assets are still subject to probate. Every state has its own probate laws, which determine who the deceased’s next of kin is and in what order their family members will inherit assets. This is called intestate succession.
Protecting your children’s futures is the most important part of all of this, especially if they haven’t reached the age of majority yet. If you don’t want your children to receive a court-appointed guardian, it’s critical that you have a will detailing who should be their guardian instead. You can’t name a guardian for your children in a trust.
A trust still might be useful if your children are young. When you set up a trust, you can decide how your beneficiaries should use the money.
For example, you might not want to give your children uninhibited access to the trust as soon as they turn 18. Instead, you might decide that your children should each receive a stipend until they’re a little older when you think they’re going to make responsible decisions about what to do with the money.
Now, after we’ve gone over a tremendous amount of information, we’ve reached the most critical question. What’s right for you?
Almost everyone should have a will, no matter what their circumstances are. You might not think it matters much, or you might not think you have assets worth deciding the distribution of in advance.
However, it’s still a good idea. Here’s why:
Whether or not setting up a trust is right for you is more variable. It’s generally more complicated and expensive than drafting a will, and it will depend heavily on your financial situation and needs.
Learn how your spouse and heirs could have been negatively impacted if your estate plan hasn't been updated to reflect the new laws. Find out what the new regulations did to open 6 estate planning "wormholes" in our downloadable PDF.
The speed with which your beneficiaries need the assets you have left to them and the size of your estate will both contribute to your need for a trust, but there’s no one way to make that choice. In the end, you’re the only person who can decide whether a trust is the best decision for you.Estate planning is complicated, and there’s no reason for you to struggle through it alone. Contact NextGen Wealth today for a free financial assessment, a referral to an attorney or CPA, or for an extra set of expert eyes on your estate planning documents and tax returns. We’re here to help.
NextGen Wealth, LLC is a registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities product, service, or investment strategy. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor, tax professional, or attorney before implementing any strategy or recommendation discussed herein. NextGen Wealth LLC is registered as an investment adviser in the states of Missouri and Kansas, and is notice-filed in the State of Texas. As such, it may only transact business with residents of those states and residents of any other state where otherwise legally permitted subject to exemption or exclusion from registration requirements.
Legal, privacy, copyright and trademark information