Understand the Key Features of Each of These Estate Planning Tools
Perhaps the most-asked question in the realm of estate planning is this: Should I establish a will or a trust? The answer to this question can be complex and will vary based on your circumstances. However, in this article, we will hit on some of the key features of a will and a living trust so that you can better understand these two common estate planning vehicles.
What is a Will?
A will is a document that is enforced after your death that details the distribution of your estate. The reason why I clarify after is that it is not put into effect during your life. Rather, your will is put into effect by a probate court after your passing. It is during the process of probate that a judge effectively interprets your will and works with your executor and estate to distribute assets. Depending on your residing state and the size of your estate, probate court can be a lengthy and expensive process. It is also public – and contestable. This means that, if someone feels they were left out of your will unfairly and that they are entitled to a piece of your estate, they can potentially contest your will.
On the positive side, wills are a very low-cost solution for establishing a basic estate plan. A simple combination of proper asset titling and a will could provide a significant amount of protection depending on the assets in your estate and the state that you reside in. Depending on your particular circumstances, it could very well make sense to forgo establishing a revocable living trust and instead have a will in place.
What is a Living Trust?
Now, let’s move on to discussing the option of a living trust. A revocable living trust is the most common type of trust. As the name suggests, a living trust is established while you are living. A revocable living trust allows you to avoid the probate court process and have more control over where your assets go after you pass. When you establish a living trust, there are three parties involved:
- The Grantor – the entity or person that makes the trust
- The Trustee – the entity or person who enforces and administers the terms of the trust
- The Beneficiary – the entity or person who ultimately benefits from the trust assets down the road
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It is extremely common that the grantor and the trustee are the same person. For example, you could establish a living trust, therefore becoming the grantor and name yourself trustee since you will administer it. When you pass away, perhaps your children are named beneficiaries. At that time, a successor trustee (often a family friend, or maybe even one of your children) would step in to enforce and distribute the assets according to the terms of your trust. Generally speaking, nothing changes from a tax standpoint. During your life, the living trust will generally not have a separate tax ID, as you are the grantor and trustee of the trust and can revoke it at any time. The bottom line is that you typically don’t have to worry about having a tax return for the trust itself during your lifetime, which helps keep things simple.
A major trade-off with a living trust is that they are more expensive to establish. While a will can cost you several hundred dollars to put in place, a living trust can be well over $1,000, depending on the complexity of your estate.
Other Trusts and Estate Planning Tools
A living trust isn’t your only option. The types of trusts and strategies that you can deploy for your estate plan can seem endless. Depending on your estate planning needs, there could be other forms of trusts that could help you optimize your estate plan and, therefore, help you leave more of your wealth to your heirs. For the sake of not overwhelming you, most estate plans will either have a will or revocable living trust at the center of them, which is why I have made these instruments the stars of this article. Understanding them at a high level is important in your estate planning journey.
Next Steps
Although the majority of financial planners do not, technically, provide specific legal advice or draft legal documents, many do provide estate planning guidance and education that can help you better understand potential routes you can take. This knowledge can help optimize your future meetings with an estate planning attorney when it comes time to draft documents. Keep in mind, most estate attorneys are going to bill you by the hour.
If you are spending hours just trying to grasp the concept of wills vs. living trusts, this is money coming out of your pocket. That is why at MDRN Wealth, estate planning is part of our comprehensive planning process. It is not only the right thing to do for our clients, but we also know it can potentially save you thousands. We can be with you at your estate planning meetings with your attorney to help articulate the goals and objectives of your estate plan, too. If you feel like you would benefit from a comprehensive financial plan that includes estate planning, please schedule a call with us.
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Important Disclosures
MDRN Wealth LLC does not provide specific legal or tax advice. Please consult with professionals in these areas for specific legal and tax recommendations. The information provided herein is general information. It is not intended to be construed as investment, tax, or legal advice. Information in this article is not an offer or solicitation to purchase, sell, or endorse a specific company, security, investment vehicle or strategy. Investing involves risk and the possible chance for loss of principal. Please consider your tolerance for risk before investing. Past performance is never guaranteed and future results can vary. Opinions conveyed by MDRN Wealth LLC cannot be viewed as an indicator of future performance and are subject to change. Results may vary. Use information at your own risk.
