We are all going to pass away someday, hopefully, far in the future. To prepare in case something happens, you will want to do some estate planning. Estate planning involves planning how your assets will be managed and distributed after your death.

Everyone can benefit from some level of estate planning, young, old, rich, or poor. It can be uncomfortable to think about, but having a plan will make things much easier for your loved ones once you are gone.

Review MoneyWellths Estate Planning Checklist

Wills

A will is a document that informs what you would like to have done to your possessions after your death.

If someone dies without a will and has assets like stocks or real estate, then the assets go to probate. Probate is a legal process where a deceased person’s assets are identified and then distributed. The court appoints the executor of the will, usually someone who has been named in the will, as the person to oversees collecting the assets, paying off debts, and the distribution of assets to the designated recipients. If there is no will or an executor is not named in the will, then the court appoints an “administrator” to function as an executor.

Even when a will is drawn up and is clear, it still goes to probate to determine that the will is authentic and valid. Having a will in place is much better than not having one. With the will, you make it clear where your assets should go, and even if contested, judges and lawyers refer to the will to try to sort everything out. If there is no will, then assets will be arbitrarily distributed by the probate judge without the benefit of your input.

Revocable Living Trust

A trust is a legal entity that is drawn up by a lawyer. Wealthy individuals and families will often have irrevocable trusts established. Anyone can make one, and many people should consider it, even if you are not a millionaire. 

A trust is seen as an entity, like an individual. Once money is placed in a trust, it no longer belongs to the individual or family who had the assets and put them in the trust. The assets become the property of the trust. The person(s) who established the trust can make rules as to who and how the trust is administered. With a trust, you can:

  • Give your heirs an allowance over time
  • Skip generations so that it is distributed to relatives not even born yet

You have much more control of exactly how your assets are distributed over time when you establish a trust, and you can be much more creative with its distribution.

Advantages of a Trust

Full control – The person who establishes the trust makes up all the rules as to how assets will be distributed

Tax advantages – Once assets are in the trust, they no longer belong to the person who put them in. The advantage of this is that there are inheritance and other taxes that can be legally avoided when the money is distributed.

Tax savings – A trust may allow the person establishing the trust to go into a lower tax bracket, saving money, since income from investments is now part of the trust, not the individual taxpayer who sets up the trust.

Harder to contest – The most significant benefit of a trust is that it is much more difficult to contest. Once the person dies, the money will be distributed to the intended recipients, and in a way that the person(s) intended. 

A trust should be reviewed and updated every five to ten years, or when life circumstances change, like the birth or death of a child or grandchild. Inheritance laws and taxes change, and trusts need to be updated at times to take advantage of the laws as they exist, to minimize tax payments to the government legally.

Wills vs. Trusts

The bottom line is that everyone should have a will to control the distribution of assets at death. It helps the family members left behind to make the uncomfortable and disorderly situation less problematic. A trust is a vehicle that allows for more accuracy, precision, and creativity in the distribution of assets.