Everyone wants to protect their families, even after they pass from this world. That’s the purpose of estate plans. But how do you know whether all of the elements of a good plan are in place?
The first step is understanding the difference between a will and a trust:
- A will lays out your wishes for what happens to your property after you die and names a legal representative to carry out your wishes upon your death. You can change your will at any time.
- A revocable trust (sometimes called an inter vivos trust) is a trust that you create during your lifetime. Property placed in this type of trust can be distributed during your lifetime or after your death. You can change the terms of a revocable trust at any time because you still retain ownership on the property even though legal title to the property is held by the person or entity to whom the property is passed. For tax purposes, you still are considered the owner of the property because you control what happens to it. For example, if you wish to do so, you can change the beneficiary of your trust’s assets from your child to a charitable institution.
- An irrevocable trust is a trust that is created during your lifetime. Once the property is placed in the trust and ownership transfers to your beneficiary, you no longer own that property and cannot make any changes to the trust. For tax purposes, irrevocable trusts remove the value of property from your estate so that it can’t be taxed when you die. The trust property is also outside the reach of creditors.
- Because wills must pass through probate, they become part of the public record. Unlike wills, trusts do not pass through probate so their terms can remain private.
Having both a will and a trust is key to protecting your family and other beneficiaries. Each has its advantages and disadvantages, but together, they provide fuller protection. For example, trusts don’t allow you to name a guardian for children, but wills do. Similarly, your will can spell out wishes for your funeral or specify who you want to receive your watch collection. Trusts cannot do this. Trusts, however, have other purposes: they can be used to plan for unforeseen events, such as disability, or to do important tax planning.
Furthermore, there are many types of trusts. “Revocable” and “irrevocable” trusts are only the tip of the iceberg. Depending on the goals you are trying to accomplish, you may want to put some property in a revocable trust and other property in an irrevocable trust.
End-of-life issues are another aspect of comprehensive planning but are not addressed fully here. Consider whether you want to put in place a do-not-resuscitate order or whether you want extreme life-saving measures to be taken. Select a specific person or people to make these decisions for you in the event you can’t make them for yourself. To address these issues, you may want to include a “living will” in your estate plan.
Remember that state law often governs these documents, which makes it important to get advice from an expert who understands the laws in your area.
Estate planning is complicated and ever-changing. The best advice is to consult your accountant, attorney, financial planner or insurance representative to get the planning advice you need for your specific situation. Call an estate planning attorney such as Bott & Associates, Ltd. today if you’d like us to point you in the right direction.