Wills Trusts and Estates are legal terms that relate to how you plan for your future and what happens to your property and assets after you die. Wills, trusts, and estates are important tools for estate planning, which is the process of arranging for the management and distribution of your estate according to your wishes and goals.
In this article, we will explain what wills, trusts, and estates are, how they work, and why they matter. We will also provide some tips and resources for creating your own estate plan.
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What Are Wills?
A will is a legal document that spells out how you want your affairs handled and assets distributed after you die. A will can also 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.
A will must be signed and witnessed as required by state law. Its implementation requires a legal process called probate. A will must be filed with the probate court in your jurisdiction and carried out by your designated executor.
The document is publicly available in the records of the probate court which oversees its execution and has jurisdiction over any disputes.
What Are Trusts?
A trust is a legal arrangement that provides for the transfer of assets from their owner, called the grantor or trustor, to a trustee. A trustee is a person or entity that holds and manages assets for the benefit of one or more beneficiaries according to the terms of the trust document.
A trust can be created during the grantor’s lifetime (called a living trust) or after the grantor’s death (called a testamentary trust). A trust can also be revocable (meaning the grantor can change or cancel it) or irrevocable (meaning the grantor cannot change or cancel it).
A trust can have various purposes and benefits, such as:
- Avoiding probate: A living trust can bypass the probate process and allow for faster and more private distribution of assets to the beneficiaries.
- Reducing taxes: A trust can reduce estate taxes by removing assets from the grantor’s taxable estate or by creating charitable deductions.
- Protecting assets: A trust can protect assets from creditors, lawsuits, or irresponsible beneficiaries by placing them under the control of a trustee.
- Providing for special needs: A trust can provide for the care and support of a beneficiary with special needs without affecting their eligibility for government benefits.
- Preserving wealth: A trust can preserve wealth for future generations by setting conditions or limitations on how and when the beneficiaries can access the assets.
What Are Estates?
An estate is everything you own—all your property and property rights, even assets with loans against them. Your estate does not die when you do. It has to move into the ownership of a living beneficiary because a decedent cannot own property.
How your property is managed and distributed after your death depends on whether you die with a valid will (called testate) or without a will (called intestate).
If you die with a will, your estate will be distributed according to your wishes as expressed in your will. Your executor will be responsible for carrying out your instructions and settling any debts or taxes.
If you die without a will, your estate will be distributed according to state law. The probate court will appoint an administrator to manage your estate and settle any debts or taxes. The state law will determine who inherits your property based on their relationship to you.
Why Do Wills, Trusts, and Estates Matter?
Wills, trusts, and estates matter because they affect how you plan for your future and what happens to your property and assets after you die. Wills, trusts, and estates can help you achieve various goals, such as:
- Providing for your loved ones: You can ensure that your spouse, children, relatives, friends, pets, or charities receive what you want them to have after you die.
- Protecting your interests: You can appoint someone you trust to make decisions on your behalf if you become incapacitated or unable to communicate.
- Preserving your legacy: You can express your values and wishes for how you want to be remembered and honored after you die.
- Avoiding conflicts: You can prevent disputes or litigation among your heirs or creditors by clarifying your intentions and expectations.
- Saving time and money: You can avoid or minimize the costs and delays of probate, taxes, or legal fees by planning ahead and using the appropriate tools.
How to Create Your Own Estate Plan
Creating your own estate plan can be a complex and challenging process that requires careful consideration and professional guidance. Here are some steps and tips to help you get started:
- Take inventory of your assets: Make a list of everything you own, such as real estate, bank accounts, investments, retirement accounts, life insurance policies, vehicles, jewelry, art, collectibles, etc. Include the value, location, and ownership details of each asset.
- Identify your beneficiaries: Decide who you want to inherit your assets and in what proportions. Consider your spouse, children, relatives, friends, pets, or charities that you care about. Also, think about who you want to exclude or disinherit from your estate.
- Choose your fiduciaries: Select the people or entities that you trust to carry out your wishes and manage your affairs. These include an executor of your will, a trustee of your trust, a guardian of your minor children, an agent of your power of attorney, and a health care proxy of your living will or advance directive.
- Draft your documents: Consult an estate planning attorney to help you draft the legal documents that reflect your goals and comply with state law. These may include a will, a trust, a power of attorney, a living will or advance directive, a beneficiary designation form, etc.
- Review and update your plan: Review your estate plan regularly and update it as needed to reflect any changes in your life or circumstances. These may include marriage, divorce, birth, death, relocation, inheritance, etc. Also, check the laws in your state to see if they have changed or affected your plan.
Frequently Asked Questions (F&Q)
What are the 4 types of trust?
Here are the 4 types of trusts:
- Living trusts (also known as inter vivos trusts) are created during the lifetime of the grantor. They are a popular estate planning tool because they can help to avoid probate, which is the court-supervised process of distributing a person’s assets after death.
- Testamentary trusts are created in a will and take effect after the grantor’s death. They are often used to provide for the care of minor children or to protect assets from creditors.
- Revocable trusts can be changed or revoked by the grantor at any time. This makes them a flexible estate planning tool, as the grantor can adjust the terms of the trust as their needs change.
- Irrevocable trusts cannot be changed or revoked by the grantor. This makes them a more permanent estate planning tool, but it also means that the grantor loses control over the assets in the trust.
What assets Cannot be placed in a trust?
There are a few assets that cannot be placed in a trust. These include:
- Retirement accounts: This includes accounts such as 401(k)s, IRAs and 403(b)s. These accounts have specific rules about how they can be distributed, and placing them in a trust could trigger early withdrawal penalties.
- Life insurance: Life insurance policies are typically owned by the insured person, and they cannot be transferred to a trust without the consent of the insurer.
- Tangible assets: This includes items such as real estate, cars, and jewelry. These assets can be placed in a trust, but they must be titled in the name of the trust.
- Assets that are subject to a lien: This includes assets that are secured by a loan, such as a car loan or a mortgage. These assets cannot be placed in a trust without the consent of the lender.
How to create trust?
There are two main ways to create a trust:
- Do it yourself: This is the least expensive option, but it can be time-consuming and complex. There are many online resources that can help you create trust yourself, but it is important to make sure that you understand the legal requirements in your jurisdiction.
- Hire an attorney: This is the most expensive option, but it is also the safest. An attorney can help you create a trust that meets your specific needs and complies with the law.