Do you have a will or a trust established?
Thinking about what will happen to your assets after you are gone is an important part of your financial plan. Creating a will or trust helps ensure your wishes are executed correctly. But, understanding what each document can mean for you can be confusing. Learn the difference between a will, probate and a having a trust below.
READ ALSO: 4 tips to help achieve your financial resolutions
What happens with a will?
A will allows you to protect and distribute property owned by you at your death through a written legal document. By detailing who should inherit what, you try to ensure that your possessions are distributed according to your wishes, rather than state laws. Following are considerations specific to individual situations:
• With a will, you have more flexibility in disbursing your possessions and property among friends and charities.
• Without a will, your property is distributed according to state intestacy laws, which generally prioritizes blood relatives. If the state is unable to locate any relatives, your property may wind up in the state’s possession.
• With a will, you can generally divide your assets between your spouse and other parties as you see fit, although your spouse may have to consent.
• Without a will, most state laws will grant your surviving spouse all of your property if there are no children.
You have children
• With a will, you have the option to adjust the shares between anyone you wish. For example, you can divide them between your spouse or legal partner and your children.
• Without a will, in many states your property might be shared between your spouse and your children, which can create challenges if your children are minors.
You have debt
• With a will, you direct your personal representative, who is named by you in the will and then appointed by the court, how to settle your debts.
• Without a will, a court-appointed official, also known as a personal representative, uses your estate to settle any debts.
Probate is a court process to provide for an organized way of winding up a deceased person’s affairs. During this process, a personal representative or executor is appointed by the Probate Court to supervise the collection of your probate assets, payment of your final bills and taxes, and distribution of your assets according to either your will or the intestacy laws. This may or may not be what you intend and might be more expensive than if you made other plans in advance.
Having a will does not mean that your estate will avoid probate. Your will only affects property owned by you at your death. It typically does not affect property which is owned as joint tenants with rights of survivorship, which passes by beneficiary deed or designation, including “Pay on Death” or “Transfer on Death,” or which is owned by a trust.
If you die owning property in your name without a will, your estate still passes through probate—but who receives your property will typically be determined under the laws of the state where your primary residence is at your date of death (the “intestacy laws”).
There are ways to distribute your property at your death according to your wishes without going through probate. While the techniques might vary from state to state, these typically include:
• Titling property jointly with another (“joint tenants with rights of survivorship”)
• Creating a beneficiary deed for real estate
• Adding a “transfer on death” or “pay on death” designation to assets, such as bank or investment accounts, or by beneficiary designation for assets such as your retirement plan, IRA or life insurance
• Creating a “revocable” or “living” trust and retitling your assets in the name of your trust
The trustee holds the legal title to the property owned in the revocable trust, not you as owner. The trust property is held by the trustee for your benefit during your lifetime. You can choose to serve as your own trustee as long as you are able. At your death, the property held in the trust is distributed by the successor trustee of the trust to those family members, friends or charities you name in your trust agreement, similar to the instructions you can leave in your will.
A living trust
There are many advantages to creating a living trust:
Control: You can be your own trustee during your lifetime and then you name a successor trustee (such as a bank) to serve after you cannot or do not wish to serve.
Flexibility: You can typically change the terms of the trust at any time while you are living. If you become disabled, your successor trustee can step in and pay your bills, manage your investments and allow you to avoid “living probate” where a court appointed conservator might be needed to manage your affairs. You can establish trusts for your minor children or grandchildren to be created after your death, hold assets in further trust for disabled or disadvantaged beneficiaries and even create trusts for charities.
Privacy: The terms of the trust and its assets and values are typically private, unlike a probate proceeding, which is a public matter where your will (if any) and list of assets are filed with the court and open to inspection by anyone.
Your living trust would be part of your overall estate plan, which would likely include a “pour over will” (just in case assets weren’t retitled into your trust’s name at your death), powers of attorney for financial and healthcare decisions and a living will.
An estate planning attorney can discuss what estate plan is right for you. Your banker or financial advisor can also talk with you about your options and assist you with your financial goals, working together with your attorney and other trusted advisors.
Christine Graham is executive vice president and chief fiduciary officer at UMB Bank.