Do You Have a Plan: Wills and Trusts

September 27, 2016

 As my husband and I prepare to welcome our first child, one of the things we want to make sure to take care of prior to her birth is setting up a proper will and establishing a living trust.  While preparing a will can sound like a very morbid activity, the security that comes from knowing your affairs are in order is worth taking the time to set one up.  Regardless of your situation, having a will and/or trust is crucial to making sure that the loved ones you leave behind are taken care of in addition to several other benefits.

 

Obviously, having a will allows you to decide how you want your estate to be disbursed after you’ve passed and who will care for your children if they are still minors.  While we all hope to live long, healthy lives, there are no certainties, and, personally, I want to be able to celebrate the birth of my daughter knowing that if anything were to ever happen to my husband and me, she would be cared for by someone that my husband and I trust and have handpicked to raise her.  Furthermore, having a will can help you avoid a lengthy probate process in court.  Probate is the legal process of deciding what will happen to your estate once you have passed, and having a clearly written-out will can help streamline the process.
 

An additional benefit of having a will is the chance to minimize taxes on your estate by detailing charitable donations and gifts that you’d like to be made following your death. Because gifts made (up to a certain amount) and donations are excluded from the estate tax, noting in your will any gifts you'd like to be made to friends and family or donations that you’d like to be made to any charitable organizations can help you minimize taxes on your assets.

 

Finally, having a will ensures that your estate does not pass to someone you’d rather it not pass to.  While setting up a will requires some effort, it can easily be amended later on as your life situation changes, ensuring that you can add new children and remove ex-spouses should the need arise.

 

Once you have a will in place, you may want to also consider the benefits available to you from setting up a trust.  Trusts are ideal for individuals who have accumulated a substantial amount of wealth and want to add an additional level of protection for that money above and beyond a will.  Trusts function similar to wills in that you specify exactly how you want the funds to be used, however, the courts give preference to the dictates of a trust over a will such that trusts are able to completely avoid probate.

 

There are two basic types of trusts: revocable and irrevocable trusts.  Your decision on which type of trust to set up depends largely on how much control you want to maintain over the money in the trust.  A revocable trust gives you the greatest level of control over the money placed in the trust and what happens to it.  Because it is “revocable” the trust can be “revoked” in addition to being changed or amended at any time.  For many individuals, the flexibility afforded by a revocable trust is highly desirable, however, there are tradeoffs.

An irrevocable trust is much more “set in stone.”  Once money is placed in an irrevocable trust, it ceases to be yours and becomes property of the trust.  As such, the money is also safer from bankruptcy and creditor claims because it no longer belongs to you.  Depending on how the trust is funded, you may also be able to minimize the capital gains taxes on the investments within the trust since the trust files a separate tax return from your own, something not available with a revocable trust which is listed on the same tax return that you file personally. Your decision on what type of trust to use will depend on your circumstances and, as previously mentioned, your preference for control, but it isn’t a decision that should made lightly.  How a trust is set up can have huge ramifications for how the funds within a trust are used so it’s worth your while to take the time to make sure it’s done right.

 

If you don’t have a trust, or at the very least a will, it likely has less to do with the potential benefits and more to do with wanting to avoid thinking about death.  Unfortunately, I can’t control what the future holds and neither can you.  What I can control is what happens to the things I have accumulated over the course of my life and being able to state in advance who I want them to benefit and in what way makes it just a little bit easier to face uncertainty with the knowledge that whatever happens, the loved ones I leave behind will be ok.  There are many services available online that can help you get started with the process of writing up a will.  If you’re looking for something a little more in-depth like a trust, I would highly recommend finding a lawyer that you trust who can help you hash out the details and get the “morbid” stuff out of the way so that you can enjoy the present with a little less fear of the uncertain future.

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