Estate Planning: Passing Down Wealth Without Worry

Estate Planning: Passing Down Wealth Without Worry

When planning for the future, it’s essential to consider how your assets will be distributed after your death. Two of the most common tools in estate planning are wills and trusts. Understanding their differences, benefits, and drawbacks can help you decide which is best for your circumstances. In this article we’ll share pros and cons of wills and trusts, how to create each, what is probate, and important tips to consider when deciding the best course of action for your personal circumstances. First you need to understand what happens to your assets after death. 


What Happens to Assets After Death:

Ownership and Access: The deceased person's assets, such as bank accounts, real estate, and personal property, are generally frozen in a sense that they cannot be accessed or transferred until the probate process begins. However, these assets are not seized by the state; they remain part of the deceased’s estate.

Probate Process: The probate court oversees the process to ensure that the deceased’s debts are paid and the remaining assets are distributed according to the will or state intestacy laws (if there is no will). The executor or administrator, once appointed by the court, manages the estate during probate, including paying debts and distributing assets.

Distribution Without a Trust:

Without a Trust: If there is no trust, the probate process is typically required to distribute the assets. This process ensures that the deceased’s debts are settled and the correct heirs receive the remaining assets.

With a Will: A will directs how assets should be distributed, but it still must go through probate for the instructions to be executed.

Intestate (No Will): If the deceased person did not leave a will, the probate court will distribute the assets according to state laws, which outline who the rightful heirs are.


What is Probate?

Probate is the legal process that occurs after someone dies, during which a court oversees the distribution of the deceased person's assets. The purpose of probate is to ensure that the deceased’s debts are paid and that the remaining assets are distributed to the rightful beneficiaries according to the will, or if there is no will, according to state law.

Steps Involved in the Probate Process:

1. Filing the Will: If the deceased left a will, it is filed with the probate court.

2. Appointing an Executor or Administrator: The court appoints an executor (named in the will) or an administrator (if there is no will) to manage the estate.

3. Inventorying Assets: The executor or administrator compiles a list of the deceased’s assets, including property, bank accounts, and investments.

4. Paying Debts and Taxes: The estate's debts, including any taxes, are paid using the estate's assets.

5. Distributing Assets: The remaining assets are distributed to the beneficiaries named in the will or, if there is no will, to the heirs according to state law.

6. Closing the Estate: Once all debts and taxes are paid and assets are distributed, the executor files a final report with the court, and the estate is closed.


Pros of Probate:

Legal Validation: Ensures that the will is valid and that the deceased’s wishes are followed.

Debt Resolution: Provides a structured process for settling debts and claims against the estate.

Dispute Resolution: Offers a legal forum to resolve disputes among heirs or beneficiaries.


Cons of Probate:

Time-Consuming: The probate process can take several months to years, depending on the complexity of the estate.

Costly: Legal fees, court costs, and executor fees can reduce the value of the estate. Usually 3%-7% of the estate.

Lack of Privacy: Probate is a public process, meaning that the deceased’s financial information and the details of their estate are accessible to the public.


Avoiding Probate:

Many people seek to avoid probate to save time and reduce costs. Common strategies include:

Living Trusts: Assets placed in a living trust bypass probate.

Joint Ownership: Property held jointly with right of survivorship passes directly to the co-owner. This is rarely recommended. Frankly, I can't think of a time when I would recommend making a beneficiary a co-owner because of tax implications (capital gains taxes, gift taxes, etc…), and how messy it could get if something happened to the co-owner or the co-owner chose to not distribute the funds according to the will of the deceased, because it’s legally there’s nothing that requires them to. This is the same as a Transfer upon Death Deed where the deed would be transferred to someone else upon the death of the owner. They would still face the same tax implications and run into the same problems as making someone a co-owner.

Beneficiary Designations: Accounts with designated beneficiaries, such as life insurance or retirement accounts, pass directly to the beneficiaries.

Understanding the probate process and its implications can help in making informed decisions about estate planning to ensure a smoother transition for your heirs.


Because the best choice for most people is to create either a will or a trust, or a combination of both, here are more details about the pros and cons of both and how to create them.

 

What is a Will?

A will is a legal document that outlines how you want your assets distributed after your death. It can also include instructions for guardianship of minor children.

Pros of a Will:

Simplicity: Easier and less expensive to create than a trust.

Flexibility: Can be changed or revoked at any time while you are alive.

Guardianship: Allows you to appoint guardians for minor children.

Cons of a Will:

Probate Process: Wills must go through probate, which can be time-consuming and public.

Limited Control: Does not provide for asset management if you become incapacitated.

Probate process cost: Wills are subject to probate. While wills are less expensive to create they tend to leave your beneficiaries with significantly less because of the probate process costs. Probate expenses usually end up being between 3%-7% of the estate. 

When to Use a Will:

If your estate is relatively simple.

If you want to ensure guardianship of your minor children is specified.

If you are looking for a more straightforward, less expensive estate planning option.

A will can also be used in conjunction with a trust.

 

What is a Trust?

A trust is a fiduciary arrangement that allows a third party, or trustee, to hold and manage assets on behalf of beneficiaries. Trusts can be established during your lifetime (living trusts) or after death (testamentary trusts).

Pros of a Trust:

Avoids Probate: Assets in a trust bypass probate, leading to quicker distribution.

Privacy: Trusts are not public records, unlike wills, which can become public.

Control: Offers detailed control over how and when assets are distributed.

Cons of a Trust:

Complexity and Cost: More complex and expensive to set up and manage than a will. It's estimated that a trust will cost between $200 and $2000 to create depending on how complicated your estate is and who you hire to create it.

Maintenance: Requires ongoing management and updating as circumstances change.

When to Use a Trust:

If you have significant assets or complex family dynamics.

If you want to avoid the probate process and maintain privacy.

If you need to manage assets for minor beneficiaries or those with special needs.

 

How to Create a Will

1. List Your Assets and Beneficiaries: Determine what you own and who should receive it.

2. Choose an Executor: Select someone you trust to carry out the terms of your will.

3. Appoint Guardians: If you have minor children, designate guardians.

4. Draft the Will: Use a lawyer or a will-writing service to draft the document.

5. Sign and Witness: Ensure the will is signed and witnessed according to state laws.


How to Create a Trust

1. Determine the Type of Trust: Decide between a revocable or irrevocable trust based on your needs.

2. Appoint a Trustee: Choose a reliable person or institution to manage the trust.

3. Draft the Trust Document: Work with an attorney to create the trust agreement.

4. Fund the Trust: Transfer ownership of your assets to the trust.

5. Sign and Notarize: Complete the legal formalities to make the trust valid.


Both wills and trusts are essential estate planning tools, but they serve different purposes. A will is generally more suitable for simpler estates and those who want to name guardians for their children. A trust is beneficial for those with more complex estates or who wish to avoid probate and maintain privacy. Consulting with an estate planning attorney can help you decide which option is best for your situation and ensure that your documents are properly executed.

 

Helpful tips:

Tip #1:

No matter which direction you take it is important to know that taxes play a big part in how much inheritance a person ultimately receives. Each state is different, some of the main taxes you should look into in your state and federally include but are not limited to inheritance tax, gift tax, and capital gains tax. Reviewing and understanding these taxes and how they can affect your estate and your estate beneficiaries can help you determine the best way to pass your estate onto your children or other beneficiaries so that they get the most out of it. Some of these taxes are only applicable under certain conditions so do your research or better yet, talk to an accountant to learn the tax implications on your beneficiaries in the specific estate planning scenarios you are considering.

 

Tip #2:

If you are creating a trust, make sure you understand the difference between a revocable trust and an irrevocable trust. A revocable trust can be changed or edited after it’s been created and an irrevocable trust cannot be changed after it’s been created. You can set up your trust so that it is revocable until death, after which it becomes irrevocable. This is helpful in the event that you created your trust as a married couple, so that a spouse cannot change the deceased’s part of the trust after they’ve passed away. 

 

Tip #3:

If you would like to set up a trust, but are struggling to pay for it, see if your children would be willing to help pay for the trust creation. After all, it’s going to save them money in the long run. You can set up the trust so that the trust will eventually pay for itself. Include a statement that the cost of the trust creation will be paid back to those who paid for its creation before the rest of the trust is distributed. In many instances setting up a trust will save your beneficiaries tens of thousands of dollars or more in probate expenses (usually equaling 3-7% of the estate) and court/legal hassle. If my parents came to me and asked me if I’d be willing to pay $200 to $2000 to create a trust that would get paid back to me and put tens of thousands of dollars in my pocket in the long run I would do it in a heartbeat. Frankly, I would do it just to bypass the legal hassle of the probate process. 

 

Tip #4:

You can have both a will and a trust. You can set it up so that the trust manages the financial side of things and the will will designate who will become the guardians of your children, who you’d like to inherit specific items and other important things not designated by the trust.


Estate planning is important to make sure your loved ones and beneficiaries are taken care of after you pass away. Both wills and trusts have important parts to play. Be sure to consult an estate attorney and an accountant to help you learn the tax implications and decide what estate planning tools will best fit your individual circumstances.

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