Step 7: Wills & Trusts
Wills and trusts are valuable estate planning tools, whether used separately or in combination. Both serve the purpose of transferring an estate to heirs, but a trust offers the added advantage of bypassing probate court. Essentially, a trust holds and manages assets according to specific instructions, whereas a will solely provides directions for asset distribution.
Personal Financial Note
Wills & Trusts
Wills are documents that direct the distribution of your assets after your death to your designated heirs and beneficiaries. It also can include your instructions for matters that require decisions after your death, such as the appointment of an executor of the will and guardians for minor children, or directions for your funeral and burial. A will can direct an executor to create a trust and appoint a trustee to hold assets for the benefit of particular persons, for example, for minor children until they reach majority or a specified age. Additional info on the different types of wills can be found here.
Unlike wills which take effect upon death, trusts become effective once assets are transferred into them. A “living trust” can be created during a grantor’s lifetime. Or a trust may be a “testamentary trust” created after death in accordance with directives in the decedent-grantor’s will.
Trusts are legal arrangements that provide for the transfer of assets from their owner, called the grantor or trustor, to a trustee. They set the terms for the trustee’s management of the assets, for distributions to one or more designated beneficiaries, and for the ultimate disposition of the assets. The trustee has a fiduciary obligation to handle the trust assets in accordance with the terms of the trust document and solely in the best interests of the beneficiaries. Additional info on the different types of trusts can be found here.
Types of Wills:
Simple Will: The most basic type of will that outlines the distribution of assets and appoints an executor to oversee the process. Suitable for individuals with uncomplicated estates.
Testamentary Will: Created to amend or revoke a previous will and ensure that the most current wishes are legally recognized.
Joint Will: A single will made by two individuals, usually spouses, where both parties agree on how their assets will be distributed.
Living Will: Also known as an advance healthcare directive, this document expresses an individual’s medical treatment preferences if they become incapacitated and are unable to communicate.
Types of Trusts:
Revocable Living Trust: A flexible trust that allows the creator (grantor) to retain control over the assets during their lifetime, modify, or revoke the trust’s terms as needed. It becomes irrevocable upon the grantor’s death, avoiding probate.
Irrevocable Trust: Once established, this trust cannot be modified or revoked by the grantor. It is used for estate tax planning and asset protection purposes.
Testamentary Trust: Created through a will, this trust takes effect after the grantor’s death. It allows control over asset distribution to beneficiaries based on specific conditions or over time.
Special Needs Trust: Designed to support individuals with disabilities without jeopardizing their eligibility for government benefits.
Charitable Trust: Intended to benefit charitable organizations, while also providing potential tax advantages for the grantor.
Spendthrift Trust: Protects beneficiaries from squandering their inheritance and shields assets from creditors.
Dynasty Trust: Created to pass wealth through multiple generations while minimizing estate taxes.
Qualified Personal Residence Trust (QPRT): Enables the grantor to transfer their primary residence or vacation home to beneficiaries while reducing gift and estate taxes.
Life Insurance Trust: Holds life insurance policies outside of the grantor’s estate to avoid estate taxes.
Grantor Retained Annuity Trust (GRAT) and Grantor Retained Unitrust (GRUT): Allows the grantor to transfer assets to beneficiaries while retaining an income stream for a specific period.
Family Trust (Bypass Trust or Credit Shelter Trust): Helps maximize estate tax exemptions for both spouses.
Pet Trust: Ensures that pets are cared for and supported financially after the owner’s death.
Each type of will and trust serves distinct purposes, and the choice of which one(s) to use depends on individual circumstances, goals, and estate planning objectives. Consulting with an estate planning attorney can provide valuable guidance in selecting the most appropriate legal instruments to secure your assets and protect your loved ones.
Some of this info was compiled using the following resources: ChatGPT, Investopedia, Legal Zoom, and Trust & Will
Important Disclaimer: I am not an estate planning attorney, and the information provided here should not be considered as legal or investment advice. Before implementing any estate planning resources mentioned above, it is essential to conduct thorough due diligence and consider consulting with a qualified professional.
While I support the idea of DIY estate planning, especially for simple and straightforward wills and trusts, it is crucial to exercise caution and ensure you fully understand the legal implications. In some cases, people may be taken advantage of by estate attorneys who insist on their services when it may not be necessary.
Ultimately, the decision to seek legal counsel or complete estate planning documents without an attorney should be made thoughtfully. Remember that the content on this website is intended for educational purposes only, and it is not a substitute for personalized legal or investment advice. Always prioritize your financial well-being and make informed choices when managing your estate planning needs.
DIY Information
Drafting your own will can be done, but it’s crucial to approach the process with care and attention to detail. Keep in mind that estate planning is a legally significant matter, and a poorly drafted will can lead to unintended consequences or legal challenges. If your situation is relatively simple, and you have straightforward wishes for distributing your assets, you may consider the following steps to draft your own will:
Research the Legal Requirements: Familiarize yourself with the legal requirements for creating a valid will in your jurisdiction. These requirements can vary from one place to another, so it’s essential to know the rules specific to your location.
List Your Assets and Beneficiaries: Make a comprehensive list of all your assets, including real estate, bank accounts, investments, and personal belongings. Determine how you want these assets distributed and identify your beneficiaries (individuals or organizations).
Choose an Executor: Select someone you trust to carry out the terms of your will as the executor. This person will be responsible for managing your estate and ensuring your wishes are fulfilled.
Write the Will: You can use templates or online will-writing software to create your will. Be clear and specific in your instructions, including the identification of beneficiaries and the assets they will receive.
Include Guardianship Provisions (if applicable): If you have minor children, you may want to designate a guardian to care for them in case something happens to both parents.
Witness and Sign the Will: Depending on your jurisdiction’s laws, you may need to have your will witnessed and signed by two or more witnesses to make it legally valid.
Keep the Will Safe: Store your will in a secure and accessible location, such as a safe deposit box or with a trusted individual. Inform your executor or a close family member about the location of the will.
Regularly Review and Update: Life circumstances can change, so it’s crucial to review your will periodically and make updates as needed to ensure it reflects your current wishes.
While drafting your own will is an option, seeking professional legal advice could help, especially for complex estates or unique family situations. An estate planning attorney can provide personalized guidance, ensure your will is legally sound, and help you navigate any potential challenges. Remember that a well-prepared will can offer peace of mind and protect your loved ones after you’re gone.
Opening your own trust involves several steps, and it’s essential to proceed with caution to ensure the trust is legally valid and serves your intended purposes. Here are the general steps to open your own trust:
Determine the Type of Trust: Decide on the type of trust that suits your needs. Common types include revocable living trusts, irrevocable trusts, and testamentary trusts. Each has specific features and implications, so research and choose the one that aligns with your goals.
Identify the Assets: Create a comprehensive list of assets you want to include in the trust. This may include real estate, bank accounts, investments, and other valuable possessions.
Choose Trustees and Beneficiaries: Select trustees, who will manage the trust and carry out your instructions, and beneficiaries, who will receive the trust’s benefits.
Draft the Trust Document: Create the trust document, which outlines the trust’s terms, beneficiaries, trustees, and distribution instructions.
Fund the Trust: Transfer the identified assets into the trust. This process may involve changing ownership titles or re-titling assets in the name of the trust.
Sign and Execute the Trust: Sign the trust document in the presence of a notary public or witnesses, as required by your jurisdiction’s laws.
Maintain the Trust: After establishing the trust, continue to manage it diligently. Keep accurate records, review and update the trust as needed, and ensure it aligns with your changing circumstances.
Communicate with Beneficiaries: If appropriate, inform the beneficiaries of the trust and share relevant details with them.
Make adjustments as needed: Regular periodic review of the trust documents and holdings can help keep the intended purpose of the trust up to date and ensure accuracy.
Remember that creating and managing a trust can be complex, and the legal and financial implications can be significant. Seeking professional advice can help to ensure your trust is properly established and aligned with your specific goals and needs.
