One of the most common questions regarding setting up an estate plan is, “Do I need a will or a trust?”
Many have heard about their friends setting up living trusts and wonder if that is what they need.
A will is instructions by a person who names one or more people to handle and distribute property and assets at death.
With a will you get the opportunity to say where you want all your stuff to go. If you do not, each state has a formula to decide for you. Wouldn’t you rather decide? Also, if you have minor children, you can decide who you want to care for them.
Obviously, this is a very important decision that may affect your child’s life forever. You should consider things like their appointed guardian’s proximity, child rearing philosophy, religious views and their financial ability to provide. Let’s clear up a few common misconceptions about wills.
1. An executor of a will is not a power of attorney. An executor has no power until aft er you die. They cannot handle financial affairs for you now. That is why you may need a durable power of attorney.
2. A will does not avoid probate. It is generally a one-way ticket to probate. Probate is not necessarily bad. It is a court supervised process to get your assets where you want them to go as stated in your will.
3. A will does not control where everything goes. Accounts like IRAs 401(k)s, life insurance, annuities or any other type of retirement accounts are generally controlled by beneficiary designations. If you are making your will, this would be a good time to make sure all beneficiary designations are up to date. If they are not, your money could end up somewhere you did not intend (Google the horror story “the pension pickle”).
How about a trust?
A trust is generally a “will replacement.” It has a plan of distribution just like a will.
One of the biggest reasons a trust may be used in place of a traditional will is probate
avoidance.
There are many other reasons for trusts, but this seems to be the most common.
The public has objected to the cost of probate and how long it takes to complete. Attorneys are usually paid a higher level of compensation for probate assets as opposed to non-probate assets. As a result, many have turned to setting up a trust to bypass the process.
This happens by re-titling certain assets now, so that later there is no probate required.
A trust is usually much more expensive than a will, but has the potential to save a substantial amount of money when the estate is settled. Let us address some common misconceptions.
1. They are all the same. No, they are not. There are many different kinds of trusts for many different purposes. You could almost compare it to buying a car. Some have the basic equipment, while others have more features and benefits.
2. If you set up a trust you automatically avoid probate. No, no, no. You have to “fund” the trust to avoid probate. This is the biggest mistake people make when it comes to a living trust. Not getting assets titled in the trust.
3. If I have a trust I don’t need a will. There is a special will that goes with the trust called the “pour-over” will. This “pours” any property you still own when you die into your trust (you still may have a probate, though).
A will or a trust? The best way to answer this question is to visit a qualified estate planner. As I heard a local respected estate-planning attorney say early in my career, “always a will, sometimes a trust.”
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