An effective estate plan is one of the most crucial parts of a financial plan, but often a piece that is overlooked. Planning for what comes next can bring about difficult conversations and can at times feel intimidating but is key to designing a functional financial plan. When it comes time for to consider estate planning options as part of a financial plan, one of the first items discussed a will or trust. Simply put, wills and trusts are ways to distribute a person’s assets after their death. Both wills and trusts can be very simple, and both can become quite complex, depending on each situation. The important thing is to determine what you want to happen at your death and put a plan in place. This plan may include a will or a trust, and it may even include both.
Breaking It Down
A will is a legal document that dictates how you desire your assets to be distributed. Commonly after the passing of an individual, an executor, attorney, or some other personal representative will read the will and work with the court system to have the assets distributed. Often this involves going through the Probate process. Probate is not necessarily a bad thing, but it can be expensive, time consuming, and not private. Probate is just a court, with the help of a personal representative, reviewing the will and legally distributing the assets. Unfortunately, if there are discrepancies in a will or other documents being reviewed in probate, the process can run into problems and your wishes may not be carried out exactly as you intended.
On the other hand, a trust allows you to have more management or dictation about your assets after you pass. For married couples, blended families, families with special needs, trusts can be powerful tools to care and protect your loved ones. A trust could be used to protect a surviving spouse and children, ensuring their needs are met, but not allowing others to access the funds. For blended families where they may be second marriages and children from different spouses, a trust may ensure assets flow the way you intend after your passing. Trusts can even be used to dictate when children receive inheritance so that they don’t get everything at a young age or can be used to ensure a family member with special needs always is taken care of. Rather than simply stating you wishes in a will for these things to take place and trusting that will occur, a trust is a legal entity that can give you more control even after your gone.
Generally, assets within a trust are shielded from the public while a will does not. Neither a will or a trust will shield assets from the IRS entirely, but a trust may change how assets are taxed and who will pay the tax. Trusts can be revocable, meaning they can be changed while the creator is living, or can be irrevocable, meaning they cannot be changed without specific legal intervention.
A trust could play a beautiful part in a complex estate plan, but that doesn’t mean it acts alone. Even with a trust, it is common to have a will. Often the will points at the trust and acts as a directional sign. It may say that all assets should be in the trust, and anything not titled correctly in the trust is left to the trust, in this way acting like a pour-over will.
An estate planning attorney should provide a cover letter with the final documents informing the individual to make sure any assets allowed inside the trust are in the trust’s name. This can mean changing the titles of bank accounts, brokerage accounts, life insurance policies or beneficiaries. Traditional IRAs, Roth IRAs, and retirement plans have beneficiaries, so they do not need be changed. Although, it is extremely important to review your beneficiaries annually to make sure they are in accordance with your estate plan. If there are contradictions, that is where issues will begin to arise.
There is no one-size-fits-all guidance when it comes to wills or trusts. If you are looking to create your estate plan, make it a team approach. Be sure to include your CPA, your estate attorney, and your trusted financial advisor. Having all individuals working together will ensure a well-drafted plan thought out to fit your specific needs and goals. Do not wait to make your plan and reevaluate your plan every three years if one exists. Do not make your loved ones suffer through your death as well as financial matters together. It is a selfless act to create a plan now.
Derek is a CERTIFIED FINANCIAL PLANNER™ and ACCREDITED ESTATE PLANNER® with extensive experience in investments, financial planning, and estate planning. With more than 17 years in the industry, he has dedicated his career to helping guide people in making sound financial decisions.
Derek M. Oxford | CFP®, AEP®