First Things First: Why Estate Planning Is Important
Estate planning is the process of managing one’s assets and determining how those assets will be distributed after one’s death. Assets may include real estate; stocks, bonds and mutual funds; personal property; retirement accounts; and bank accounts. Collectively, a person’s assets make up his or her estate.
Even if your loved one has a small estate, he may want to create a will to ensure that his money and property are distributed according to his wishes. Otherwise, if he dies without a valid will, the state will divvy up his assets in accordance with local laws.
Preparing a Will
A will is a legal document that details how a person’s assets will be distributed after his death. Your loved one can divide his assets in whatever way he chooses. For instance, he might leave everything to his spouse, divide the estate equally among his children, or leave specific items to individuals or charities.
Your loved one should appoint an executor, a personal representative who will carry out his wishes after his death. This person will pay taxes, pay money due to creditors and distribute the assets. If your loved one doesn’t appoint an executor, the state will.
Your loved one can change or revoke his will at any time as long as he’s not mentally incapacitated. In fact, he should review his will periodically to make sure that it still works for him.
Probate is the legal process that determines the validity of the will and oversees distribution of assets, even if there is no will. The probate process differs by state.
Establishing a Trust
Like a will, a trust details how a person’s assets will be managed and distributed upon his death. But it also enables the person creating the trust (called the grantor) to designate someone to manage his assets during his lifetime should he become incapacitated.
To establish a trust, the grantor writes a trust document and transfers ownership of selected property to the trust. He also names a trustee to manage the trust for a beneficiary’s (or multiple beneficiaries’) benefit.
A living trust takes effect during the grantor’s lifetime. The grantor can appoint himself as the initial trustee so that he can manage the trust property himself. If he names himself as trustee, then he also must appoint a successor trustee to manage the trust and distribute its assets after the grantor becomes incapacitated or dies.
A revocable trust can be amended at any time as long as the grantor has capacity to do so. An irrevocable trust cannot be amended.
Choosing a Will, a Trust or Both
A will is usually easier and less expensive to set up and maintain than a trust. It may be a better option for someone with a small estate.
If your loved one establishes a trust, he’ll have to pay for the trust document to be drafted, for property to be transferred into the trust, and for management fees if he chooses to have the trust managed by a professional trustee, such as a bank.
Yet, he may want to establish a trust for reasons such as these:
- To provide for management of his assets should he become incapacitated.
- To avoid or minimize the probate process, especially for out-of-state real estate.
- To provide for the long-term support and maintenance of a child or grandchild with extraordinary needs.
- To limit the amount of money a beneficiary can receive at any one time and to prevent a beneficiary’s creditors and others from reaching the funds.
For any property not included in a trust, your loved one may need a "pour-over" will, which details how to distribute that property.
Also note that regardless of whether your loved one has a will or a trust, any property that’s jointly owned with someone else will go to the joint owner upon your loved one’s death. Any asset with a designated beneficiary, such as an individual retirement account, will go to that beneficiary.
Your loved one should not attempt estate planning on his own. He should meet with an experienced and licensed estate-planning attorney and a tax accountant. For more on estate planning, click here.