For every estate plan, there are essential documents which should be included to address the most fundamental needs of the individual in question. Of these documents the foremost are wills and trusts. While these two instruments can be used for passing down assets to loved ones, they do so in different ways. We shall now discuss these two estate planning documents separately.
A will is also formally called a last will and testament. A will is a written document which contains the wishes of the testator (the maker) regarding the disposal of their possessions when they are gone. As a testator, your will must bear the names of the individuals and/or institutions that you desire as your beneficiaries. It must also contain clear and precise wordings concerning what assets and quantity each beneficiary should receive, as well as an executor who would represent you after your death to ensure that the instructions on your will are duly carried out. In your will, you may name a guardian for your minors.
When does a last will go into effect?
A last will only becomes effective the moment the testator passes away. Nothing about the will can be done until the death of the testator, after which it must be filed by the executor to the probate court in the same county where the testator domiciled and owned property.
Can all assets be distributed with a will?
Only assets held in the name of the testator only can be disposed using a will. These assets must hence pass through a court process known as probate before they can be inherited. Jointly held assets and those having designated recipients e.g. IRAs, insurance proceeds and POD accounts pass to the designated recipient regardless of a will.
Requirements for writing a valid will
For a will to be valid, it must be
- Written by a person of 18 years of age or more
- Written by a person of a sound mind
- Bear the signature of the testator
- Bear the signature of at least two persons who witnessed the signature of the testator.
When a will is found not to comply with to the requirements listed above, it is said to be invalid. An invalid will is discarded by the court and the deceased is said to have died intestate. In this case, the intestacy laws of the state in question will be used in disposing the property of the deceased rather than their wishes. Intestacy laws vary from state to state. The heirs by intestacy in most states are the surviving spouse and direct descendants of the deceased.
Trusts are a more complex asset transfer tool compared to a will. Whereas a will goes into effect only after the death of the testator, a trust become effective as soon as it is executed and funded i.e assets are named after the trust. Those assets become the property of the trust and will be managed by the trustee on behalf of the beneficiary.
Types of trusts
There are basically two kinds of trusts
- Revocable living trust
- Irrevocable trust.
A revocable living trust also simply called a revocable trust or living trust has more flexibility that an irrevocable trust. As the name reveals, a revocable trust can be revoked or altered at any time during the lifetime of the trustor (trust creator). The trustor has the freedom to name himself as the trustee of his trust, thus given him the liberty to use the trust assets for his own benefit. However, he must appoint a successor trustee who must act on his behalf when he falls into incapacity or dies, at which the successor trustee must then pass on the assets to the beneficiary, or manage it for minors till they come of age.
Since the trustor has access to the living trust assets and can remove them at any time, they are still part of the trustor’s estate and are liable to estate tax impositions. Nevertheless, they will pass to the beneficiary outside probate.
Advantages of a living trust
- Avoids probate (which is often quite expensive, tedious, and lengthy)
- Is used for incapacity planning.
Irrevocable trust: this kind of trust cannot be revoked or altered once created. The assets funded into the trust become full property of the trust and takes the name of the trust. For this reason, the assets held therein will not be affected by tax. However, care and proper thought should be given before funding assets into the trust. The assets should be those which you do not expect to use until death.
Advantages of an irrevocable trust
- Used for estate tax avoidance
- Avoids probate
- Offers asset protection.