Basic Anatomy of a Family Estate Plan
Everyone needs an estate plan, regardless of your age, stage in life, and the amount of assets you have.
An Estate Plan should include a Health Care Proxy with advance directives about end of life planning–if that is your choice–and a financial Power of Attorney. Your estate plan should also include the anchor document to distribute your assets, which is either a Will or a Revocable Living Trust. You also should consider life insurance, pre-need funeral insurance and planning, and legacy preservation. Finally, for your Estate Plan to ultimately be useful, it needs to be easily accessible when an emergency happens.
In this article, we’re going to get into a little more detail about the difference between a Will and a Trust.
There are many factors to consider when deciding between a Will-based estate plan or a Revocable Living Trust-based estate plan, but for the average American family, a Will-based plan is suitable and appropriate. Both a Will and a Revocable Living Trust, broadly speaking, are legal documents that contain instructions as to how you want your assets managed. The big difference between them is that a Will only goes into effect when you die and a Revocable Living Trust goes into effect during your lifetime.
Most families are familiar with a Will, or Last Will and Testament. A Will is a legal document that designates who you want to inherit your assets. More importantly, if you are a parent of minor children, your Will also is where you formally nominate who will be the guardians of your children.
For married couples, it is important to remember that each spouse needs to have their own Will. Your Will controls what you individually own at your death. So, for example, if you and your spouse jointly owned a home, and you die, your spouse would automatically own your half of the home. Your Will would not control the house, because you did not individually own it. Usually, married couples have mirror Wills, wherein spouse one gives everything to spouse two and if spouse two predeceases, to their children and vice versa. For second marriages, there are usually provisions for the current spouse and any joint children but it usually also includes provisions for children of the first marriage.
What many families may not be as familiar with are Trusts, types of Trusts, and when and why some families choose to anchor their estate plan around Trusts instead of Wills.
What is a Trust?
Some families use trusts as part of their estate plan, but what are trusts and how do they work? A Trust is an agreement in which a person called a Settlor gives assets to be held in Trust and picks someone to manage the Trust. This person is known as the Trustee. The Settlor also determines the terms of the Trust and importantly, the chosen individuals who will benefit from the Trust, known as Beneficiaries. A Trust can be created through an oral agreement, but most Trust agreements are formalized in writing.
Some trusts are irrevocable and some trusts are revocable. Irrevocable trusts are trusts that cannot be changed or amended per the terms of the Trust. Often irrevocable trusts are used for Medicaid planning. Once you transfer assets into an irrevocable Trust, you have forfeited all ownership interest. A revocable Trust, as is obvious from its name, is a Trust in which the terms of the Trust can be amended or altered as long as the Settlor has capacity. It should be noted that even if the Settlor lacks capacity, it is possible that the Settlor granted his/her agent under a Power of Attorney the authority to modify the Trust, however, without a Power of Attorney with that specific authority, a revocable Trust usually becomes irrevocable upon the Settlor’s incapacity or death.
Trusts can be created and funded during your lifetime and this type of trust is known as “living” trust because it is created when you are alive. A testamentary trust is a trust that is created and funded by your Will–your Last Will and Testament, hence testamentary–and thus this type of Trust is realized upon your death and the probate of your Will.
Why Should I Consider a Trust?
Trusts can be created for many purposes. Common reasons to create a Trust are to control the assets of minors, or others under a disability or addiction, who cannot manage the assets. Many people also create Trusts for pet care to make sure that their beloved pets are taken care of, no matter what happens. People also create trusts to protect real estate or the inheritance of their children.
How does a Revocable Living Trust work for couples? One spouse can create the Trust and both spouses can fund it by transferring their jointly held assets into the Trust. Each spouse would still need their own Pour-over Will, so that any remaining assets held individually by the decedent spouse would become part of the Trust. Of course, this only works when both spouses have a shared vision for how they want their assets to be managed and distributed.
Although there are many types of Trusts, not everyone needs a Trust, and certainly most Americans can have a successful Estate Plan without a Trust if they have a Will. Trusts are options to consider when creating your Estate Plan, but which document is better for your situation?
Some Factors to Consider in Deciding Which is Best for You:
Some say that a Revocable Living Trust can help you to avoid probate.
Probate is the legal process of getting your Will approved by the courts upon your death. Probate officially appoints the Personal Representative or executor of your estate, so that they can distribute your assets to your named beneficiaries. A key thing to note is that, when you create a Revocable Living Trust, you still need to create a Will.
Why do you still need a Will if you have a Revocable Living Trust based Estate Plan? Because rarely do you transfer everything you own into the Trust while you’re living. So, you need a special type of Will, known as a Pour-over Will, to “pour” all of the assets that you own into your Revocable Living Trust upon your death. Therefore, an all-encompassing, Trust-based Estate Plan would also include a “Pour over” Will.
While some argue that having a Revocable Living Trust avoids probate, usually the Pour-over Will has to be probated, so those costs and the legal time and effort is not completely avoided. It should also be noted that, depending on the state you live in, the costs of probating your estate may depend upon the size of your estate.
Traditionally, it is much less expensive to create a Will than a Revocable Living Trust.
With Gentreo, the comparative financial costs are leveled, so it’s not necessarily more expensive to create a Trust when you do so with Gentreo.
Also, there are similar costs in administering or managing a Will and a Revocable Living Trust. As mentioned above, probate costs may be greater depending upon which state you live in and the size of your estate. The question is, when do you want to incur those costs? With a Will, those legal and management costs are applied after you die. With a Revocable Living Trust, those costs incur during your lifetime. There are costs to transfer assets into a Revocable Living Trust, such as recording fees for real property, and there are also ongoing accounting and tax considerations for a Revocable Living Trust.
Your stage of life may determine whether a Will or Revocable Living Trust is more appropriate.
If you are young and in the process of building wealth, you undoubtedly want immediate access and control of your assets and would not want them tied up in a Revocable Living Trust, so you would probably want a Will-based estate plan. If you are older and have more assets, you may want to create and fund a Revocable Living Trust. Remember, this type of Trust is more work for you during your lifetime. Also, this Trust cannot be used for Medicaid asset reduction planning because it is revocable, within your control, and for your benefit during your lifetime.
Please note that this article is not comparing a Will to an Irrevocable Trust, which is used for protecting assets so that the government pays for long term care in a skilled nursing facility.
Revocable Living Trusts provide more privacy than Wills.
If privacy is a major consideration for you, you would want a Revocable Living Trust-based estate plan. Generally, Revocable Living Trusts only become part of public court records when there is a lawsuit involving the Trust or its beneficiaries. However, a Will becomes part of the public court record when it is filed for probate. Therefore, if privacy trumps all other factors for you, then you should consider a Revocable Living Trust-based estate plan.
Both documents safeguard your beneficiaries' inheritance.
With both a Revocable Living Trust and a Will, you can safeguard your beneficiaries’ inheritance. Again, the factor here is timing. With a Will, you can create a Testamentary Trust to protect your beneficiaries upon your death. A Revocable Living Trust can protect its beneficiaries during your lifetime.
Whether you create a standard Will in which you choose all your beneficiaries or a Pour-over Will, which works in tandem with a Revocable Living Trust and its only beneficiary is that Trust, it is still necessary that you nominate a guardian of your minor children and a Personal Representative of your estate. If you only have a Revocable Living Trust and neglect to create a Pour-over Will, you are disregarding these important issues and thus leaving it up to the courts to decide who should be in charge of your children and control your estate.
Based on the above factors, most Americans choose a Will-based estate plan. However, as your life circumstances change, you may want to switch from a Will-based estate plan to a Revocable Living Trust-based estate plan. No matter which type of plan you choose, it is critical that you complete all of your essential estate planning documents including a Health Care Proxy, Power of Attorney, Will and/or Revocable Living Trust and store them in a secure and easily accessible location, like your Gentreo Digital Family Vault, and share them with your chosen loved ones.
