If you’re busy juggling your career and family responsibilities, you may already be working toward two key objectives – paying for college for your children and saving for your own retirement. Yet, there’s another goal you don’t want to ignore: Creating an estate plan that provides for your loved ones, allows others to manage your finances should you become incapacitated, and leaves the legacy you desire.
A comprehensive estate plan involves the creation of multiple documents, but two main areas of focus may be the creation of a will and a living trust. If you’re not familiar with these legal documents, you might have several questions: What do they do? What’s the difference? Do I need one of the two or both?
Let’s look at both:
What is a will?
It’s fair to say that everyone with dependents (and probably most people without them) needs a will. A will is a legal document that expresses your wishes about how you want your assets distributed and who you’d like to serve as guardian for your minor children. In your will, you name an executor, who is responsible for administering and distributing your estate based on your directions in the will.
If you die without a will, the courts will oversee the distribution of your assets – and the results may not be at all what you had in mind. Furthermore, if you have minor children, the court will appoint a guardian – and this individual may not be who you would choose for the role.
Clearly, a will can be a valuable tool in your estate plans. But there are drawbacks to relying solely on a will to accomplish your estate planning goals. For one thing, a will typically must go through the probate process, which can be time-consuming and expensive. Also, a will, unlike a living trust, lacks privacy – it is a public record, which means the way your assets were distributed could be accessed by the public. Also, if a will is not drafted properly and does not incorporate the current estate laws, it might not include provisions to reduce potential estate taxes.
Here’s one other important point to keep in mind: Not all assets pass through your will. Some of your important assets, such as proceeds from your IRA, 401(k) and life insurance, will pass directly to the beneficiaries you’ve named. In other words, these beneficiary designations can supersede whatever instructions you’ve left in your will, so it’s a good idea to review the designations periodically to ensure that they’re still accurate and that they reflect any changes in your family situation.
What is a living trust?
While several types of trusts are available, one of the most commonly used is a revocable living trust. It’s called “revocable” because you, as the person who established the trust (the “grantor”), can change the terms of the trust as you choose. The other parties involved in a living trust are the trustee, the individual you appoint to oversee the management of the assets in your trust, and the beneficiary, the recipient for whom the assets are managed.
A properly written living trust offers these main benefits:
- Your estate can avoid probate and the associated privacy concerns of a will becoming public record. Assets titled in the name of the trust avoid probate because the trust itself is already established as the legal owner of the property and the beneficiaries you’ve named are considered the legal recipients of those assets. So, executing a living trust requires retitling of assets in the name of the trust.
- You can plan for your own incapacity. A living trust allows you to name someone to manage your investments and other assets if you become incapacitated.
- You can be specific about how your assets will be distributed. You may have some highly specific goals about how you want your assets to be distributed upon your passing. For example, instead of just leaving a lump sum to a child who you believe may not be capable of responsibly handling the funds, you can arrange, through your living trust, to have the money distributed gradually, over a period of years.
Establishing a living trust will involve some upfront costs, as you will certainly need to work with a qualified legal professional. You may also need to consult with your tax and financial advisors. And you might want to enlist the services of a professional trustee if you don’t know someone with whom you’re comfortable in administering your trust.
Do I choose a will, a living trust or both?
Ultimately, you’ll have to discuss your particular situation with your estate planning attorney to determine whether a will, trust or a combination of the two best meets your estate planning needs. By having the right advisors on your side, you can feel confident that you’re making the right moves for your family and your legacy.
Edward Jones, its employees and financial advisors are not estate planners and cannot provide tax or legal advice. You should consult your estate-planning attorney or qualified tax advisor regarding your situation.