Talking about the inevitable can be difficult. But not planning for your death can cause substantial emotional, financial, and relational issues. Financial advisor and educator Stuart Spivak says many of his clients are unsure of where to start. He recommends educating yourself about wills and trusts.
A Will
A will, “Last Will and Testament,” is an instrument of power and the cornerstone of an estate plan. Creating one gives you control over the distribution of your assets. If you die without a will, the state decides what becomes of your property without regard to your wishes or concerns. Believe it or not, only 30–35 percent of adults have a will in place. This is not surprising since nobody wants to be reminded of their own mortality or spend too much time thinking about what should happen once they are gone. A will is a legal document by which an individual, known as the “testator,” or couple outlines their wishes and instructions regarding the distribution of their assets after death occurs.
Living Will
A living will, also known as an advanced directive, is the document that spells out your wishes regarding end of life decisions. They can include resuscitation decisions, tube feeding, and organ or tissue donation. You can also indicate your comfort care level, like pain management, hospice care, and palliative care.
Before we go any further, it’s important to go over some key terms in regards to a will:
- Executor(s): responsible for carrying out the wishes outlined in a will.
- Guardian(s): designated to care for your minor child(ren). If you die without naming a guardian, the court will decide who will take care of your child(ren).
- Probate: the legal process in which the validity and authenticity of a will is verified and determined. A will is subject to probate.
- Financial and Healthcare Power of Attorney: vital documents that name someone if you are incapacitated and therefore unable to make these decisions yourself.
Deciding on an executor and guardian are not easy decisions. The executor is most likely a trusted loved one and the one who is responsible for carrying out the wishes of the deceased. It is an honor to be chosen for this role but at the same time it can be a “curse.” This role comes with a tremendous amount of responsibility for what can be a very long time. The executor can be a trusted friend, a licensed professional — like an attorney or accountant — or a third party.
A guardian for your minor children is also very personal and a major decision not to be taken lightly. This person or persons would most likely be a family member or parent. These selected people would be named in your estate documents and should be asked ahead of time. For minor children, it is important to make sure financial arrangements are spelled out: Where is the money going to come from to take care of your child(ren) if you are no longer here? At what ages, can your child(ren) access the money after their health, maintenance, education, and support needs are addressed? You should spell out these wishes in your estate plan.
A financial power of attorney would come into play if or when someone is physically or mentally unable to pay bills, do banking, or safely manage their money. A medical power of attorney would authorize the person or people to make medical decisions if or when you are physically and/or mentally unable to do for yourself.
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A Trust
A trust is the most comprehensive way to protect your assets and loved ones while avoiding probate. There are different types of trusts so it is important to consult with a professional to determine if a trust is necessary and if so, what kind. The most common type of trust is a revocable living trust.
A revocable living trust is normally revocable or changeable by the person who initially contributes assets to the trust — the trustor. While the trustor retains control over the revocable living trust, the trust itself remains a flow-through entity, meaning there are no additional tax returns filed (the tax ID number is usually a Social Security number). At the death or incapacity of the trustor, the nature of the trust changes and the terms become irrevocable, locking the instructions and distributions in place. The trust is then administered in a process outside of probate, and the named trustee(s) works to distribute the assets in accordance with the trustor’s wishes.
Many people do not want to deal with probate because it is public, takes a long time, and can be costly. The revocable living trust is easy to create and easy to manage, yet it still circumvents probate and allows for restrictions on how assets are distributed. A revocable living trust is an effective estate-planning tool that allows families to pass their hard-earned wealth free of the fear of family conflict.
There are also other types of trusts: Irrevocable Trust, Special Needs Trusts, Pet Trust, Gun Trusts — just to name a few.
Irrevocable Trust
An irrevocable trust is generally not changeable by the trustor and, therefore, controlled by a third party — the trustee. An irrevocable life insurance trust is oftentimes used to hold a life insurance policy in order to remove the proceeds from a taxable estate.
Special Needs Trust
This is so important to have in place if money and/or assets will be left to a loved one who has a special needs situation, either physically or mentally challenged. When properly structured, this type of trust will not jeopardize the government assistance that a minor or adult child is receiving.
Pet Trust
As you would guess, this document would spell out the wishes you have for a pet or pets if/when you pre-decease them.
Gun Trust
A gun trust authorizes you to protect your gun(s) both during and after your lifetime without the complications that typically surface after a gun owner’s passing.
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A Will Vs. Trust
Everyone should have a will and the other basic estate-planning documents, but it depends whether or not a trust is needed.
A trust might not be needed if your estate is under a certain amount (typically $100,000, but the amount can vary state by state). You may also choose to opt out of a trust if your assets can be passed to loved ones by either beneficiary designation and/or transfered/paid on death designations. We believe that if you own property in multiple states, then a trust can be beneficial.
Spivak suggests if someone doesn’t have a complicated situation and their wealth consists of assets that can pass at death by beneficiary designation (like an IRA, 401(k), or life insurance) then a trust is typically not needed.
Benefits Of A Will And A Trust
A will spells out your wishes instead of having the state decide what is best for you and your loved ones. A trust helps you avoid probate; it gives you privacy. A will is not private and the information contained in someone’s last will and testament becomes public information when probated. This is not the case with a trust. A trust will also ease the administration if minor children are involved. It protects your children and/or grandchildren from themselves in case of lawsuits or divorces.
Next Steps
The majority of the time, Spivak recommends talking with a financial advisor who can typically refer you to an estate attorney. Most people do not know what they do not know. Having a professional help you with this is money well spent in my opinion.
The average cost of an estate plan can vary greatly, depending on your needs. A comprehensive estate plan which includes a will, revocable trust, financial and healthcare powers of attorney, and a living will should cost approximately $2,000–$2,500. The total amount would depend on whether these documents were being prepared by an estate attorney or a document preparer. The cost also fluctuates if the documents are cookie-cutter or customized. Either way, it is worth getting comprehensive advice in this important area.
Pro Tip: Keep in mind, estate planning documents are state specific when it comes to healthcare powers of attorney, as an example. If someone wants to use an estate attorney, they must be licensed in your state of residence.
This material was prepared by TravelAwaits and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note: investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting, or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax, or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
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