Estate planning is the process of managing a person’s assets and determining how those assets will be distributed after one’s death. Assets may include real estate; stocks, bonds and mutual funds; personal property; retirement accounts; and bank accounts. Collectively, a person’s assets make up his or her estate.
Even if there is a small estate, one may want to create a will to ensure that his or her money and property are distributed according to their wishes. Otherwise, if he or she dies without a valid will, the state will divvy up his assets in accordance with local laws.
Preparing a Will
A will is a legal document that details how a person’s assets will be distributed after his death. One can divide his or her assets in whatever way they choose. For instance, he or she might leave everything to their spouse, divide the estate equally among their children, or leave specific items to individuals or charities.
There should be an executor, a personal representative who will carry out his or her wishes after death. This person will pay taxes, pay money due to creditors and distribute the assets. If no executor is appointed, the state will appoint one.
One can change or revoke a will at any time as long as he or she is not mentally incapacitated. In fact, he or she should review their will periodically to make sure that it still works for them.
Probate is the legal process that determines the validity of the will and oversees distribution of assets, even if there is no will. The probate process differs by state.
Establishing a Trust
Like a will, a trust details how a person’s assets will be managed and distributed upon his death. But it also enables the person creating the trust (called the grantor) to designate someone to manage his assets during his lifetime should he become incapacitated.
To establish a trust, the grantor writes a trust document and transfers ownership of selected property to the trust. He also names a trustee to manage the trust for a beneficiary’s (or multiple beneficiaries’) benefit.
A living trust takes effect during the grantor’s lifetime. The grantor can appoint himself as the initial trustee so that he can manage the trust property himself. If he names himself as trustee, then he also must appoint a successor trustee to manage the trust and distribute its assets after the grantor becomes incapacitated or dies.
A revocable trust can be amended at any time as long as the grantor has capacity to do so. An irrevocable trust cannot be amended.
Choosing a Will, a Trust or Both
A will is usually easier and less expensive to set up and maintain than a trust. It may be a better option for someone with a small estate.
If one establishes a trust, he’ll have to pay for the trust document to be drafted, for property to be transferred into the trust, and for management fees if he chooses to have the trust managed by a professional trustee, such as a bank.
Yet, he may want to establish a trust for reasons such as these:
- To provide for management of his assets should he become incapacitated.
- To avoid or minimize the probate process, especially for out-of-state real estate.
- To provide for the long-term support and maintenance of a child or grandchild with extraordinary needs.
- To limit the amount of money a beneficiary can receive at any one time and to prevent a beneficiary’s creditors and others from reaching the funds.
For any property not included in a trust, one may need a “pour-over” will, which details how to distribute that property.
Also note that regardless of whether your loved one has a will or a trust, any property that’s jointly owned with someone else will go to the joint owner upon your loved one’s death. Any asset with a designated beneficiary, such as an individual retirement account, will go to that beneficiary.
One should not attempt estate planning on their own. They should meet with an experienced and licensed estate-planning attorney and a tax accountant.