Estate planning involves deciding how you want your assets distributed if you become unable to make your own financial decisions or after you die. Estate planning can be complicated, so it’s best to consult a financial advisor and/or an elder law attorney drawing up your estate plan.
It’s important to have a basic estate plan in place regardless of your net worth. Although it may seem like a morbid chore, estate planning offers several benefits:
- You get to name the people to whom you wish to give your assets – and your wishes will be legally binding.
- You can arrange it so that taxes siphon as little as possible from your estate.
- You have the satisfaction of knowing that your financial affairs are in order, so you won’t bequeath a costly administrative nightmare to your loved ones.
An estate plan can include several elements:
- A will
- Assignment of power of attorney, which gives the person you name the authority to manage your financial affairs if you are unable to do so
- A living will, which is a statement of your wishes for the kind of life-sustaining medical intervention you want, or don’t want, in the event that you become terminally ill and unable to communicate
- A healthcare proxy, which authorizes someone you trust to make medical decisions on your behalf.
For some people, a trust may also make sense.
Understanding the Differences Between a Will and a Trust
Most everyone has heard the terms “will” and “trust,” but not everyone knows the differences between the two. Both are useful estate planning devices that serve different purposes, and both can work together to create a complete estate plan.
One main difference between a will and a trust is that a will goes into effect only after you die, while a trust takes effect as soon as you create it. A will is a document that directs who will receive your property at your death and it appoints a legal representative to carry out your wishes. By contrast, a trust can be used to begin distributing property before death, at death, or afterwards.
A will covers any property that is in your name only when you die. It does not cover property held in joint tenancy or in a trust. Wills do have limitations. In particular, the beneficiary designations on financial accounts, insurance policies and other assets take precedence over wills, so it’s important to make sure your beneficiary designations are up to date and reflect your wishes.
A trust is a legal arrangement through which one person (or an institution, such as a bank or law firm), called a “trustee,” holds legal title to property for another person, called a “beneficiary.” It is a legal entity that lets you put conditions on how certain assets are distributed upon your death. Trusts also can help minimize gift and estate taxes. A trust only covers property that has been transferred to the trust. In order for property to be included in a trust, it must be put in the name of the trust.
A trust may have two types of beneficiaries — one set that receives income from the trust during their lives and another set that receives whatever is left over after the first set of beneficiaries dies.
An important difference between a will and a trust is that a will passes through probate. That means a court oversees the administration of the will and ensures the will is valid and the property gets distributed the way the deceased wanted. A trust passes outside of probate, so a court does not need to oversee the process, which can save time and money. Unlike a will, which becomes part of the public record, a trust can remain private.
Wills and trusts each have their advantages and disadvantages. For example, a will allows you to name a guardian for children and to specify funeral arrangements, while a trust does not. On the other hand, a trust can be used to plan for disability or to provide savings on taxes. Your elder law attorney can tell you how best to use a will and a trust in your estate plan.