Not having an estate plan can lead to a longer estate-settlement process (also known as probate), potential confusion and disagreements among family members over your end-of-life care and increased legal fees and court costs that your loved ones may have to bear.
This week’s article focuses on the central questions of estate planning, and in particular, whether you need to have both a will (yes!) and a trust (maybe). But first, some definitions may be in order.
What is a will?
One of the most important documents you need to have is a will, a formal legal document that states your final wishes and provides instruction for the ultimate distribution of your assets to beneficiaries.
In your will, you set forth the following instructions in a written document:
• Naming your executor, the person who will settle your affairs, pay off your debts, and file your final tax return;
• Naming guardians for minor children and providing for their care and support;
• Designating caretakers for pets;
• Directing the distribution of tangible personal property such as jewelry, vehicles, furnishings and collectibles — even digital assets — to specific beneficiaries.
A will is a public document, meaning that anyone can request a copy from the probate court and read how you directed the division of your personal and financial assets. A will can refer to other documents that are private and shield your assets from public scrutiny. More on that in a minute.
There are a number of other estate planning documents that you may need to have in place to ensure that your heirs carry out your wishes. A Power of Attorney (POA) authorizes someone else to handle your financial affairs and health care decisions on your behalf. You can have a general POA that covers a wide range of transactions, or a limited POA, which is usually used more narrowly (such as authorizing a car dealer to register a car for you).
POAs can take effect immediately or can become effective only if you are incapacitated. You can revoke a POA at any time, so long as you’re mentally competent (but be sure to do this in writing).
A durable POA (DPOA) remains in effect if you become incapacitated due to illness or an accident. DPOAs help you plan for medical emergencies or declines in mental functioning and can ensure that your finances are taken care of.
Having POA documents in place helps eliminate confusion and uncertainty when family members have to make tough medical decisions.
Health care POA vs. Living Will
A health care POA (or proxy) is useful when a medical emergency leaves you unconscious or otherwise unable to make choices about your medical care. It appoints someone else to communicate with doctors and make medical decisions for you, any time you are not able to do it yourself — and even if you are expected to fully recover.
A living will, on the other hand, details the treatment you want if you are at the end of your life and can no longer communicate.
What is a trust?
Trusts are often used to minimize estate taxes and can offer other benefits as part of a well-constructed estate plan. A trust is a fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries. Trusts can be arranged in many ways and can specify exactly how and when you (the “donor’s”) assets can pass to the beneficiaries.
There are several benefits of trusts:
• Gain more control over your wealth. You set the terms of a trust to control when and to whom distributions are made. This often comes into play when you have complex situations such as children from more than a single marriage.
• Protect your legacy. You can use a trust to shield your estate from beneficiaries who may not be good with managing money, or from your heir’s creditors.
• Privacy. Although probate is a matter of public record (as noted earlier), trusts may allow your assets to pass outside of probate and remain private.
Basic types of trusts
There are many ways that trusts can be set up to accomplish precise goals that you have for your money — both while you’re alive and after you die. Here are a few examples:
• A revocable trust (also called a “living” trust) is a written document whose provisions can be altered or modified while you’re alive. It can be structured to place personal assets into trust for your benefit while you are alive and passes them to named beneficiaries at your death. Revocable trusts avoid probate, which means that the contents are not made public upon your death, and your heirs may receive their money faster and without associated probate fees or court costs.
• An irrevocable trust is a type of trust whose provisions cannot be altered or modified. Some variations of irrevocable trusts include Marital Trusts (“A” Trusts), which are designed to provide benefits to your surviving spouse; Bypass Trusts (“B” Trusts, or credit shelter trusts), which are designed to bypass the surviving spouse’s estate in order to make full use of any federal estate tax exemption for each spouse; and
• Qualified Terminable Interest Trusts (QTIPs), which are intended to provide income for a surviving spouse during their lifetime.
Setting up the right trust for your situation can be a complex undertaking. For example, irrevocable trusts are more powerful when the goal is reducing estate taxes, while revocable trusts may be more suitable if you seek more flexibility and control over your wealth during your lifetime. And different states have different laws about trusts and how assets are taxed. We advise you to consult an attorney, as well as a financial adviser and tax professional, to determine whether it makes sense given your individual needs and circumstances.
While everyone needs a will, not everyone needs a trust. The question of whether you need a trust depends on whether you have specific intentions for directing how your assets are distributed after your death, and the size of your estate.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Wealth Enhancement Group and LPL Financial do not provide legal advice or tax services. Please consult your legal adviser or tax adviser regarding your specific situation.
Bruce Helmer and Peg Webb are financial advisers at Wealth Enhancement Group and co-hosts of “Your Money” on WCCO 830 AM on Sunday mornings. Email Bruce and Peg at [email protected]. Securities offered through LPL Financial, member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, LLC, a registered investment advisor. Wealth Enhancement Group and Wealth Enhancement Advisory Services are separate entities from LPL Financial.