How to Leave Your Assets to the Next Generation
Estate planning is a critical component of your overall financial plan. Having an estate plan in place helps ensure your loved ones are taken care of and your assets are distributed according to your wishes should something unexpected happen to you. During the estate planning process, many clients ask, “Should I have a will, a trust or both?” Here, we highlight the differences between the two estate planning documents and offer tips to help you decide whether one or both is right for you.
What is a will?
A will is a legal document that specifies how your assets will be distributed following your death. It allows you to name an executor for your estate and a guardian for any minor children. A will can be updated and changed as your life and situation change, but it only goes into effect after your death.
If you die without a will, your assets will be distributed according to the laws of your state, which may not be consistent with your wishes.
The benefits of a will
Wills can be a simple, cost-effective way to help ensure your assets are passed along according to your wishes and that the appropriate guardians are in place for your children.
The downside of a will
A will can’t help you avoid probate. In fact, probate is generally the process by which your executor will be able to use his or her powers under the will after you have passed away. The probate process can be time consuming, expensive and stressful for your heirs. Probate proceedings are also public record, so anyone (including creditors) can find out who’s inheriting (and how much they’re getting). If your goal is to avoid probate, you may need to implement additional estate planning strategies.
What is a trust?
A trust is a legal entity that holds assets and distributes them to your beneficiaries according to the trust’s terms. Unlike a will, a trust can become effective while you’re still alive and continue to operate after you die. There are several different types of trusts, including:
- Revocable trusts – Often referred to as a living trust, this type of trust is common in estate planning and allows clients to retain control over trust assets during life, specify what happens to those assets at death, and avoid probate. The client (also known as the grantor or “creator” of the revocable trust) can change the terms of the trust at any time, including making changes to the trust’s beneficiaries, modifying how assets are distributed and even terminating the trust altogether.
- Irrevocable trusts – An irrevocable trust is a less common, but nonetheless important, estate planning strategy. Once established, irrevocable trusts can’t be modified or terminated by the grantor. The grantor gives up control of the trust’s assets, and the terms of the trust typically can’t be changed without the consent of all beneficiaries. Different advanced planning occasions call for different irrevocable trusts, but commonly they’re used when a client wishes to gift assets to a third party during life for tax purposes or with certain restrictions that couldn’t be accomplished with an outright gift.
- Special needs trusts – A special needs trust can help provide financial support for an individual with special needs without disqualifying them from government benefits, such as Medicaid and Supplemental Security Income (SSI).
This type of trust is managed by a trustee who is responsible for investing and distributing assets according to the terms of the trust document. The trust’s beneficiary has no control over assets within the trust, and the trustee is held to strict guidelines that help ensure the trust is used solely for the beneficiary’s benefit, in addition to any benefits that individual may qualify for as a result of their special needs.
The benefits of a trust
Trusts offer several benefits that wills don’t. Like a will, trusts offer the ability to specify how your assets will be distributed to beneficiaries; however, unlike a will, at your death these instructions and distributions happen outside of probate. Trusts are usually the more efficient estate planning tool if you want to put age- or timing-based restrictions on assets that are passing to loved ones. Trusts allow for more backup and contingency planning than other estate planning methods, and some properly structured trusts can even provide tax benefits and asset protection. Assets that are titled in trusts are typically not subject to probate, which can help ensure your estate is settled as quickly and inexpensively as possible.
The downside of a trust
A downside to using a trust has to do with titling assets. In order for a trust to be effective, it must own assets, which means that after establishing a trust, you must retitle all assets and accounts into the trust. This can be time consuming, and some assets can be difficult or even impossible to transfer. With just a will, assets stay in your name until you die, at which point it becomes the job of your executor to retitle them to your estate.
So, do you need a will, a trust or both?
The answer to this question depends on several factors, including the size of your estate, your specific legacy goals and your family situation. If you have a small estate and simple estate planning goals, a will may be sufficient (with supplemental titling actions, you may be able to largely avoid probate). On the other hand, if you have a larger estate, complex distribution instructions or unique tax liabilities — or you wish to protect your assets from creditors — a trust may be the better option.
If you have minor children, you may need to have both a will and a trust. A will designates guardians, while a trust can help manage your assets and distribute them to your beneficiaries according to your wishes.
As you’re making this important decision, it’s wise to consult with your wealth manager and an experienced estate planning attorney. These professionals will work together to help you establish custom estate planning documents to meet your specific needs, helping ensure they’re in line with your overall financial plan and goals for the future.
