When you’re setting up your estate plan, or the plan for your assets when you die, you have many options. At the very least, everyone should have a will, but many people will also benefit from a trust and/or power of attorney.
Here’s what you must know.
What is a Will?
A will or your last will and testament is a legal document that dictates what you want to happen upon your death. It names the important parties in the process (executor and beneficiaries) and gives specific instructions for your assets and even your minor children.
Wills only take effect once you die.
How Does it Work?
If you have a will, your estate will go through probate. This is just a court proceeding that authenticates your will and formally appoints the executor that you named in the will if everything verifies correctly.
Once the court approves your executor and accounts for your total assets, they allow the executor to move forward with paying your taxes and debt first and then distributing any remaining assets to the named beneficiaries.
Without a will, the courts would have to appoint an executor and beneficiaries, which is a more complicated, costly, and time-consuming process.
What Doesn’t go Through Probate?
Fortunately, not everything goes through probate if you set up your estate properly. A will helps decrease the risk of the following assets going through probate:
- Assets with a beneficiary named, such as life insurance. It doesn’t have to go through probate and the proceeds are paid directly to the beneficiary after the executor provides proof of your passing.
- Assets inside a living trust don’t have to go through probate because they belong to the trust, not you. Upon your death, the trustee will distribute the assets according to your final wishes.
- Any assets in a payable upon death account, such as bank accounts. These accounts have a beneficiary named and instructions to distribute the funds to said person upon your death.
What if you don’t have a Will?
If you don’t have a will, it puts more work on the courts and delays the process of distributing your funds. First, the court must appoint a personal representative. It might or might not be someone related to you.
Next, they must determine who gets the assets, which is a complicated process that can take years.
What can you Put in a Will?
A will is a legal document of your final wishes. But most importantly, you can name a guardian for your children or pets. You can also say how you want your assets distributed upon your death (with court approval) and you can specify details regarding your final arrangements.
Keep in mind that even if you state how you want your assets distributed in a will, they must go through probate if you don’t have a trust. This means that the assets may or may not go to the beneficiaries the way you stated or if they do, it could be delayed.
What is a Trust?
A living trust is an entity you set up while you are alive, and you transfer assets into it and essentially out of your name. Once you put assets into a trust, you are no longer the owner – they are separate from you and are protected from any public records or even lawsuits.
Within a trust there is the grantor or the person that creates the trust (you); there is a trustee or the person that holds the assets and controls them, and beneficiaries or the people that will receive the assets upon your death according to your final wishes.
How Does it Work?
When you put your assets into a trust you don’t have to worry about probate. This is one of the best ways to avoid it, but the only way to do so is to set up an irrevocable living trust. This means once you set up the trust, you cannot change it.
Like a will, your assets are distributed to your beneficiaries as instructed, however, they can be distributed right away rather than going through the probate process. Not only does this ensure your beneficiaries get more money (fewer legal fees), but it also reduces your estate taxes since the assets are no longer in your name.
If you have assets you might need to change beneficiaries for or a home you own that still has a mortgage and you might want to refinance it, you may want to consider a revocable living trust. This trust doesn’t protect you from lawsuits and if there are creditors outstanding after your death, the trust may go through probate to give creditors the chance to come forward.
What is a Power of Attorney?
A power of attorney doesn’t affect your estate. It doesn’t dictate who gets your assets when you die or who is in charge of your estate.
Instead, a POA is someone you designate to act on your behalf if you are no longer able to make medical or financial decisions yourself. Think of it as a substitute for you if you cannot make important decisions.
When you create a POA ahead of time, you don’t have to worry about who will handle your decisions if you suddenly become unable. If you don’t appoint one, anyone wishing to handle your affairs for you would have to petition the courts to be your POA which could waste precious time in your decision making process.
What is a Healthcare Power of Attorney?
A healthcare power of attorney can make medical decisions for you if you are unable. The healthcare POA should detail what decisions you want made for you and how, such as whether you want to be resuscitated.
How Does it Work?
When you assign a POA, you give this person permission to make financial decisions for you if you were to become unable. A POA can also help you in cases when you cannot be present for a financial transaction, such as selling a house out of state or taking care of financial tasks while you are deployed.
The actions the POA is allowed to conduct are listed in your agreement and your power of attorney is limited to those issues, so make sure your POA is detailed.
How to Decide Which is Right for You
It can be a big decision to choose between a will and a trust. A power of attorney is something you can always add or have on the side, but the big decision is whether you set up a trust or not. You can have a will in addition to a trust that covers any assets that were not placed into the trust.
Setting up a trust takes time and money. You’ll need a lawyer and the money to pay for creating the trust. You’ll do this while you’re alive and able to make important decisions. You must choose between a revocable and irrevocable trust. If you choose irrevocable, make sure you are certain about your decisions to ensure that you don’t regret putting certain assets into it.
Can you Have Both a Will and a Trust?
You can have both a will and a trust, but it can get complicated. Any assets you have listed in the only in the will must go through probate whereas the assets in the trust likely will not. But, you can use the will to determine your final wishes for your arrangements as well as appointment guardians for your children and pets.
Sometimes people have what’s called a Pour over Will, which is a will that covers any assets that are not inside your trust. Any assets not in the trust will become a part of the trust once you die, which then protects your assets from probate.
The important thing is that you plan your estate early. No one likes to think about dying but planning now can make it a lot easier on everyone in your life. You’ll have peace of mind knowing your assets are taken care of and that your loved ones will be cared for upon your passing and that your assets won’t sit in probate for months or years.