Estate planning. Those words may sound like something posh people do while sipping tea and playing croquet. In American legal terms, it takes on a more morbid meaning – planning for your death. More specifically, it means planning what happens to everything you own (your “estate”) after you die.
If you are young, relatively healthy, and don’t have children, you may not think you need to have an estate plan. Maybe, as COVID-19 has ravaged the country, you’ve entertained the thought of writing a will (if only to determine what to do with your car, laptop, or dog if you get sick). Or maybe, as you have had several end-of-life discussions with families, you have heard the terms “living will” or “living trust” floating around and wondered what those really are.
This post is meant to go over the basics of estate planning, explain the difference between a will and trust, and provide resources to help you make a plan for your stuff after you die.
Why you should make an estate plan:
I am by no means an expert on estate planning, but the research I’ve done has made me aware of two important things:
- Most people will not want to die intestate (without a will). In this situation, everything you own is distributed by the state according to state laws. You have no say because you’re dead. Your family will likely end up with everything. Your friends will get nothing.
- Probate (the process of proving a will in court) is a headache, and the headache increases with the magnitude of your estate. It involves going to court, paying for lawyers, and waiting for months to find, value, sell, pay taxes on, and distribute what’s left of your estate. This process is public, so random strangers can find out what you own (and may try to claim a piece of it). This process is also costly, and your money will first be spent on probate before getting distributed to your friends and family. Many people make an estate plan with the specific goal of avoiding probate.
So, what can you do?
Wills
At the very minimum, you can make a will (aka Last Will and Testament). A will is a document that allows you to specify who gets what after you die. Your wishes will be carried out by your designated executor that takes your will through the probate process. If you have children (or minors in your custody), your will also designate a guardian to take care of your children until they turn 18. You can designate a conservator (also known as a financial power of attorney) to manage money meant for your children until they turn 18. Oftentimes, the guardian and conservator are the same person. There is a website called Free Will that can help you create one, and yes, it’s actually free (it runs on donations).
Okay, now you’ve created a will. You won’t die intestate. But what about probate? Don’t people want to avoid that? You’re right! Wills have to go through probate, so anything of value is better held in a trust (aka living trust).
Trusts
A living trust is created while you are alive. It is an account that you can put your assets into so that they are not considered part of your estate when you die. Common assets include investments, bank accounts, real estate, and valuable property. Moving assets into a trust can cost money especially if their value exceeds the annual gift tax limit ($15,000 for 2021). While you are alive, a designated trustee (which can be you) owns the trust. When you die, a designated successor trustee inherits the trust and distributes it to your beneficiaries as you specify in the trust. This all happens without going through probate, therefore expediting the inheritance time, avoiding legal fees, and keeping everything private.
In contrast to a living trust, a testamentary trust is created after you die and is a part of a will. These trusts are most useful if you have children, as it protects your assets until your children reach the age (or life accomplishment) at which you would then like to distribute your stuff to them. Of note, testamentary trusts are created at the end of the probate process and as such, are public record. Additionally, the amount of your estate that ends up in a testamentary trust may be less than you initially intended, as it will only contain what is left after probate fees and death taxes (which vary by state) are paid.
Trusts are more complicated to set up than wills, and usually require the assistance of an attorney. When creating a trust, you will need to decide if you want it to be revocable or irrevocable.
Revocable trusts can have assets moved in or out of the trust at any time. Only living trusts can be revocable (you can’t move things around when you’re dead).
In contrast, irrevocable trusts own whatever assets are put into it forever. That means that if you put your $10 million superyacht Yas Queen into your irrevocable trust, you no longer own Yas Queen. Instead, your trust owns it. So when you die, you don’t have to pay your state’s death taxes on Yas Queen. Additionally, if you owe money when you die, creditors can’t come after Yas Queen since she’s no longer yours. While you’re alive, you’ll still have to pay taxes on her as will the inheritor after you pass.
Okay, now you’ve created a trust. Your assets in your trust will be passed on without going through probate. Is there anything else you need to do to complete your estate plan? Yes! It’s recommended that you make a living will (aka advance directive).
Advanced Directives
Unlike a will, a living will is a document that comes into effect while you are still alive in the event that you are unable to make decisions. This is also known as an advance directive and details your goals for medical care, typically as pertains to end-of-life decisions. If you don’t want to make these decisions, you can also designate a healthcare proxy (also known as healthcare power of attorney) to make these decisions for you in the event that you are unable. The document varies by state and some states may require notary. Free will can also help you set up an advance directive.
Okay, now you’ve created an advance directive. Your loved ones and medical staff will know what you would want if you become seriously ill. There should be no shouting matches outside the resuscitation bay or in the ICU. Are you done? You’ve now created three of the most important documents in an estate plan. Make sure to keep these safe, and update them whenever you go through a major life change (new job, marriage, having children).
Disclaimer: It is always a good idea to consult an attorney to help you navigate this process.
FAQs:
- Can I have both a will and a trust?
- Yes! In fact, many people have a will, an advance directive (living will) and a trust. They all serve different purposes in an estate plan.
- Does a will or a trust save me more on taxes?
- In general, putting your stuff into a trust will decrease the size of your estate when you die. So if you want to decrease the value of your estate to below the death tax threshold in your state, a trust is a way to avoid paying death taxes.
- Is there any way to completely avoid paying all taxes?
- This is the billion-dollar question. Even if you manage to avoid the majority of death taxes, you and/or your beneficiaries will still need to pay income taxes on your estate. In the process of moving your stuff into a trust, you may also be obligated to pay gift taxes if the value of your contribution(s) exceeds the annual gift tax limit ($15,000 for 2021).
- When should I start estate planning?
- As soon as you have enough stuff that you are concerned about what happens to it when you die, and/or as soon as you have people that you care about enough that you want to give your stuff to them when you die. You can die any day.
- If I’m a single resident, should I make a will or a trust?
- Unless you are independently wealthy, a will should suffice. If your estate is under a state limit, your will undergoes a cheaper, faster, and simpler probate process called “summary probate”. Ultimately, a will is also cheaper to set up than a trust.
- If I’m a married attending with young kids, should I make a will or a trust?
- Depends on how much property or valuable assets you own and/or if you want to specify when/how your kids inherit your money. You need a will to designate a guardian and conservator for your kids. You may want to also create a trust for your property and accounts if they are high in value and your children/family would otherwise have to pay death taxes when you die. A trust will also speed up the inheritance process.
- If I’m a seasoned physician about to retire but I never had time to do any of this, what should I do?
- You likely have high-value assets and accounts that should be put into a trust. You should also create a living will to specify your end-of-life treatment goals/wishes if anything were to happen to you. Finally, a will can help you distribute all the other things you own that won’t be going into your trust.
Sources:
- https://www.whitecoatinvestor.com/introduction-to-estate-planning/
- https://www.nolo.com/legal-encyclopedia/wills-trusts-estates
- https://www.nolo.com/legal-encyclopedia/probate-faq.html
- https://www.policygenius.com/trusts/what-is-a-testamentary-trust/
- https://www.cbpp.org/research/state-budget-and-tax/state-taxes-on-inherited-wealth
- https://deathwithdignity.org/advance-directive/
lainey
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