Your money: Everyone needs a will, but what about a trust?

Bruce Helmer and Peg Webb

Not having an estate plan can lead to a longer probate process (aka will), potential confusion and disagreements between family members about your end-of-life care and the increased legal fees and court costs that your loved ones may have to bear.

This week’s article focuses on the central questions of estate planning, and in particular, whether you should have both a will (yes!) and a trust (maybe). But first, some definitions may be in order.

What is a will?

One of the most important documents to have is a will, a formal legal document that sets out your final wishes and provides instructions for the final distribution of your assets to your beneficiaries.

In your will, you set out the following instructions in a written document:

• Appointing your executor, the person who will settle your affairs, pay your debts and file your final tax return;

• Appointing guardians of minor children and ensuring their care and support;

• Designation of pet caretakers;

• Directing the distribution of tangible personal property such as jewelry, vehicles, furniture and collectibles – even digital assets – to specific beneficiaries.

A will is a public document, which means that anyone can request a copy from the probate court and read how you have directed the division of your personal and financial assets. A will can refer to other documents that are private and protect your assets from public scrutiny. More on that in a minute.

There are a number of other estate planning documents you may need to have in place to ensure your heirs carry out your wishes. A power of attorney (POA) authorizes someone else to handle your financial affairs and health care decisions on your behalf. You can have a general POA that covers a wide range of transactions, or a limited POA that is usually used more narrowly (such as authorizing a car dealer to register a car for you).

POAs can take effect immediately or become effective only if you are incapacitated. You can revoke a POA at any time as long as you are mentally competent (but make sure you do so in writing).

A durable POA (DPOA) remains in effect if you become incapacitated due to illness or accident. DPOAs help you plan for medical emergencies or declines in mental functioning and can make sure your finances are taken care of.

Having POA documents helps eliminate confusion and uncertainty when family members have to make difficult medical decisions.

Health Care POA vs Living Will

A health care POA (or proxy) is useful when a medical emergency leaves you unconscious or otherwise unable to make choices about your medical care. It names someone else to communicate with doctors and make medical decisions for you whenever you can’t do it yourself — and even if you’re expected to make a full recovery.

A living will, on the other hand, details the treatment you want if you are at the end of your life and can no longer communicate.

What is a trust?

Trusts are often used to minimize estate taxes and can provide other benefits as part of a well-constructed estate plan. A trust is a fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries. Trusts can be arranged in a number of ways and can specify exactly how and when you (the “donor’s”) assets can pass to the beneficiaries.

There are several benefits of trusts:

• Gain more control over your wealth. Establish the terms of a trust to control when and to whom distributions are made. This often comes into play when you have complex situations such as children from multiple marriages.

• Protect your legacy. You can use a trust to protect your assets from beneficiaries who may not be good with money management or your heir’s creditors.

• Confidentiality. Although a will is a matter of public record (as mentioned earlier), trusts can allow your assets to pass out of probate and remain private.

Basic types of trusts

There are many ways in which trusts can be set up to achieve specific objectives that you have for your money—both while you are alive and after you die. Here are some examples:

• A revocable trust (also called a “living” trust) is a written document whose provisions can be modified or changed while you are alive. It can be structured to place personal assets in trust for your benefit while you are alive and pass them to named beneficiaries upon your death. Revocable trusts avoid probate, meaning the contents aren’t made public after your death, and your heirs can get their money faster and without associated probate fees or court costs.

• An irrevocable trust is a type of trust whose provisions cannot be amended or modified. Some variations of irrevocable trusts include marital (“A”) trusts, which are designed to provide benefits to your surviving spouse; Bypass Trusts (“B” Trusts, or credit shelter trusts), which are designed to bypass the surviving spouse’s estate to fully utilize any federal estate tax exemption for each spouse; and

• Qualified terminable interest trusts (QTIPs), which are intended to provide income to a surviving spouse during their lifetime.

Creating the right trust for your situation can be a complex undertaking. For example, irrevocable trusts are more powerful when the goal is to reduce estate taxes, while revocable trusts may be more appropriate if you’re looking for more flexibility and control over your wealth during your lifetime. And different states have different laws regarding trusts and how assets are taxed. We advise you to consult an attorney, as well as a financial advisor and tax professional, to determine if it makes sense given your individual needs and circumstances.

While everyone needs will, not everyone needs confidence. The question of whether you need a trust depends on whether you have specific intentions to direct how your assets are distributed after your death and the size of your estate.

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