“Off The Wall” Blog
Unique, straight-forward, unfiltered opinion on topics of concern for individuals with newfound wealth.
Given the fact that you’re reading this, you probably already know this, so let’s skip the sentiments and get right into the big questions. If you don’t feel that simply setting money aside is a sufficient enough plan (it’s not!), there are generally two main vehicles for distributing your assets in the afterlife. The most well-known option is a Will, a legal document that everyone should have—but do you also need a Trust? And when choosing a Will or Trust, what should you consider?
A Will defined
The day you pass away, who would you rather leave in charge of your affairs— your most trusted friends and family members, or a swarm of state officials? By failing to prepare a Will, your estate will likely be controlled by the latter group, as any sort of inheritance ambiguity quickly winds up at the center of a complicated legal mess and will be resolved according to state laws.
As the standard, legally-binding document for setting forth your post-mortem wishes, a Will clearly spells out how your assets will be distributed, who will manage this process, who will take over your business affairs, and, if needed, clarifies who will care for your minor children.
There are two primary Wills you can utilize:
- Holographic Will– A Will prepared by simply writing down your last wishes with no witnesses.
- Testamentary Will– Required in many states, a testamentary Will is witnessed and notarized.
Regardless, it’s advisable to have a lawyer involved to ensure the Will is worded correctly and in accordance with state laws, as there are a few statements that may be explicitly required in the document. A Holographic Will is generally not recommended as a way to prepare for your death in advance.
When you write a will, you will address some basics, including naming an executor. This individual is charged with actually executing the terms of the Will, overseeing and managing your estate as assets are distributed to any beneficiaries named in the document.
Obviously, this job can come with some pressure, especially if your heirs contest the will and any bequests you’ve made. Be sure to make the executor aware of their responsibilities ahead of time, and double-check that they’re up for the task. The executor is also generally advised on the location of the Will, making it easier for them to access when the time comes.
You should also discuss guardianship with any friend or family member you intend to name as a guardian of minor children in your will, as this comes with a lifetime of responsibility.
Benefits of using a Will
If you want any control whatsoever over what happens to your wealth and your business when you die (and who wouldn’t?), having a Will presents a number of advantages.
- You get to divvy it up however you want– In the absence of a Will, it’s likely that a state court will decide how your assets are allocated among your heirs. Typically, they’ll award the majority of your estate to immediate family (spouse, children, and parents) first. If you’re looking to apportion your property any differently, having a Will is one reliable way to do so, giving you the ability to specifically outline which heirs get what.
- You’ll get to choose someone competent– You’ll want someone honest and trustworthy to handle important tasks like inventorying your assets, closing out lingering debts, and guiding your estate through various legal processes. If you don’t have a Will, however, the state will appoint an executor for you, leaving the integrity of your inheritance up to any individual who petitions for the position (like that neighbor who refused to clip his hedges? You really want him acting as your executor? It could happen). Writing a Will is the only way to be truly confident you’re entrusting your estate to the hands of someone credible and capable.
- Get into a fight with your brother, no problem– It’s easy to feel like there’s no room for error when writing your Will, but these decisions aren’t necessarily set in stone. If your marital status changes or you’re looking to revise your list of beneficiaries, your Will can be amended with the stroke of a pen. It’s preferable that you have these changes reviewed by an attorney and notarized, but it’s comforting to know that your first draft of a Will doesn’t have to be the version you take to the grave.
Challenges of using a Will
Although having a Will can bring greater comfort and clarity to your heirs, like any legal document, there are a few caveats and challenges to consider.
- You really should follow the rules– If improperly drafted, your Will could potentially be contested, leaving your friends and family to deal with the fallout of a tense legal toss-up. This is especially worrisome if you own a business. For this reason, it’s important to have a firm grasp on your state’s rules and standards—the last thing you want to do is leave your loved ones with a litany of lawsuits in their moment of mourning. You should seek the services of a trust and estate attorney to ensure compliance.
- Prepare to be on display– By drafting a Will, you’re making your estate a matter of public record. While your Will is usually kept private until you die, shortly after you pass the document will be handed off to a probate court, kicking off the legal proceedings required to settle your estate. At this point, your Will becomes accessible to anyone who wishes to view it (and is often available for free online).
A Trust defined
If you’re considering writing a Will, have you also contemplated a Trust? Whereas your Will is a document for outlining how your estate will be allocated after death, a Trust is a fiduciary agreement for allowing a third party (known as a trustee) to hold assets for your beneficiaries. Unlike a Will, a Trust not only applies to your wishes after death but can also help you manage assets throughout your life.
The rules of managing a Trust vary depending on the jurisdiction, but in most cases, they share a few key traits. The Trust itself owns your assets, and your Trust document will outline how assets in the trust should be used and for whose benefit both during and after your lifetime.
Most importantly, Trusts are highly versatile vehicles, providing a number of protections and advantages that a Will simply lacks. With these benefits, however, come a number of additional considerations, and individuals will need to weigh the trade-offs of each type of Trust.
Revocable Trust vs. Irrevocable Trust
Nothing is certain except for death and taxes. Luckily, a Trust can help you manage both. When it comes to choosing the type of Trust, however, most of our clients share a common question: should I create a revocable or an irrevocable trust? As always, the answer depends on your priorities.
For individuals hoping to maintain close control over their assets during their life, a revocable trust tends to be the default option, often called a “living trust”. You can think of this vehicle as a Ziploc bag. It’s easy to make changes, and you’re free to open the bag and take assets out or put them in at any given moment. You still control the assets despite the trust owning them–it’s as if they are yours except in title.
This ability to continue freely managing your assets sounds appealing at first, but it’s also a double-edged sword. Because the assets in a revocable trust remain in your estate, they’re also potentially subject to claims from creditors or lawsuits during your lifetime. Assets in a revocable trust are included in your taxable estate at death–there are no tax savings with a revocable trust. In any case, once you die, all revocable trusts become irrevocable, meaning the terms of your trust will control what happens to the assets under a new Tax Identification Number.
If a revocable trust is a Ziploc bag, an irrevocable trust is a wooden box nailed shut. Whatever assets go into the box can’t be taken out by the grantor (at least, without the permission of other parties).
But why in the world would you want to stuff your money in a box with no hope of taking it back if you change your mind? The main appeal is, of course, tax benefits. Irrevocable trusts offer the ability to minimize the effect of estate taxes, providing a vehicle for passing on large sums of wealth to spouses, children, or charities while reducing the size of your future taxable estate.
Naturally, those who grant money to an irrevocable trust tend to be wealthier individuals, but they’re also favorable for meeting other objectives, like transferring property to grandchildren or protecting beneficiaries with special needs.
Benefits of using a Trust
Regardless of whether you choose the flexibility of a revocable vehicle or the estate-reducing irrevocable trust, both flavors of Trusts offer a number of unique estate-planning benefits.
- More privacy– Trusts provide a much higher degree of privacy. Individuals can outline the same beneficiary allocations as they can in a Will without being required to publicly post the details. Assets owned by a Trust avoid the public probate process.
- More control post-mortem– Trusts give you the ability to plan further into the future beyond your death, allowing you to spell out exactly how and when beneficiaries of the Trust can access the Trust’s assets and the income they produce. They also provide protection from the claims of creditors and provide ways to ensure wealth is preserved for generations to come if desired.
Challenges of using a Trust
- It’s going to cost you– Although titling assets in a Trust will provide a variety of benefits during and after your life, there’s no question that writing a Trust with an attorney will create additional legal costs beyond just writing a Will.
- Plan to hire an accountant– A Trust, particularly an irrevocable one, also calls for a more careful accounting process as you’ll be required to keep a detailed list of assets and transactions, which can be a headache if a simple Will would have met your goals for transferring assets to your heirs at death.
- Thinking further into the future– Most importantly, a Trust may demand more careful consideration of your potential successor, as a future trustee will likely have more management responsibilities when compared to executing an estate under a Will, which is completed shortly after death. You may need to think about the succession of multiple trustees if you desire for your Trust to remain in effect far into the future beyond your death.
It’s not either/or.
Wills and Trusts are not an either/or decision. When combined strategically, Wills and Trusts can be complementary vehicles for managing a single estate. The most commonly utilized hybrid is the pour-over will, which directs property to be moved into a trust upon death (usually for recently-acquired or forgotten assets left out of the trust before death).
In many cases, the Will may even contain explicit instructions, directing the family to defer to the Trust for the most important and detailed matters of inheritance.
No matter if you’re using a Will or Trust, or a little bit of both, the process of getting everything prepared can sometimes feel like an overwhelming responsibility. Improving your estate’s privacy and optimizing for taxes are appealing benefits, but they also require a considerable amount of strategy and planning.
Effective execution of a Will or managing a Trust is certainly a daunting challenge, but partners like Monument Wealth Management offer their clients a fully customizable and elite experience called Private Wealth Design. By wholly considering and seamlessly integrating a client’s entire wealth picture, Monument’s thoughtfully curated advice provides clarity and removes the anxiety of the unknown–something that they felt was sadly missing from the industry.
At Monument, your involvement is a crucial ingredient in the wealth plan you’re after. That’s why our in-depth approach incorporates you every step of the way. If you’re ready to cross estate planning off your bucket list, Monument Wealth Management is here.
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