Are you looking to properly plan for your estate? Then you may be asking yourself, “What is the difference between a will and estate planning?” With so many complicated laws surrounding end-of-life decisions and how an individual’s belongings are distributed after their passing, it can be hard to understand what type of preparation is best suited for one’s situation. The answer depends on several different factors including the size of your estate; and whether or not there are circumstances that require special attention such as existing liabilities, or specific instructions about asset distribution within the family structure. Nevertheless, if you’d like help navigating this complex topic, read on to learn more about wills versus other forms of estate planning.
An estate plan does more than just divide your possessions after you die. It tells your loved ones how you want your money and health care managed if you become disabled or pass away. Your estate plan must include provisions for the care and financial support of your partner, young children, and any members of your family who have special requirements, after your death. Lastly, an estate plan allows for the swift and organized dispersal of your possessions while minimizing inheritance taxes.
What follows is an explanation of the distinction between a will and estate planning, the will’s place within an estate plan, and the other papers that should round out a comprehensive estate plan.
When someone passes away, they typically leave behind an “estate,” but what exactly is an estate? Your estate is essentially all the things you own. It is comprised of the following elements:
Some obligations, depending on the laws of the state in which you reside, may be recovered from your estate after your death, which could greatly decrease the worth of your estate. This means that there will be nothing to disperse per your estate plan if your obligations exceed the value of your estate. Generally speaking, family members cannot be held liable for obligations that cannot be covered by the inheritance.
Having a last will and testament drawn up is the first step in creating a solid estate plan, as most lawyers specializing in this area will tell you. You can name a guardian for your young children and specify how you want your assets distributed after your death. Beneficiaries are the people or groups named in a will to receive an inheritance.
In its simplest form, a will is just a collection of directions for the administrator to follow when handling your assets. Someone you trust to carry out the wishes in your will and oversee the management of your assets until they are dispersed to your heirs should be named as administrator. The administrator is typically overseen by a state probate court in the jurisdiction where the deceased resided.
Legal requirements for a legitimate will vary by state, but generally speaking, a will is only recognized by the courts if it was written by an adult who was at least 18 years old and fully cognizant when they signed it. In addition to the testator, the will requires the signatures of two adults. If the will is signed and penned by the same person, then it may be valid in states that do not require witnesses.
If you become mentally or physically unable to make choices about your health care, a living will outlines your preferences for how you would like to be treated. These documents, also known as “advanced medical directives,” typically detail your preferences regarding artificial respiration or other life-sustaining measures in the event that you are unable to make those choices for yourself.
You can grant someone else the legal authority to make choices about your healthcare with a healthcare power of attorney. If you become disabled, the person you’ve designated as your medical power of attorney will be able to do so. It is generally believed that a person who has healthcare power of attorney also has permanent power of attorney, but this should be made explicit in the estate plan.
You can appoint someone to handle your money matters on your behalf by executing a financial power of attorney. If you are disabled or unable to make financial choices for yourself, the person you have designated as your power of attorney will have the legal authority to do so until you recover. A probate court will designate someone to make financial choices on your behalf if you are unable to do so and have not previously granted another person lasting financial power of attorney.
Anyone you appoint as your power of attorney for money matters must do so in your best interests. This would include:
A common misconception among married couples is that they are exempt from giving their partner financial power of attorney because they hold so many of their possessions collectively. Each partner has the legal right to withdraw funds from the couple’s shared bank account; however, it is not unusual for a medical catastrophe to rapidly deplete the account’s balance. You should consider giving your partner financial power of attorney in case they need access to joint funds or a 401(k) in your name. There are some states that require power of attorney in order to apply for benefits on behalf of a partner who is disabled.
Although a trust can be created to manage an individual’s possessions after death, many people prefer to do so by creating a separate document. Its assets can be transferred without going through probate, and estate taxation may be lowered if distinct trusts are established.
A trust is a contractual relationship in which one person or entity transfers legal ownership of funds or property to another person or entity (the “trustee”) for the advantage of a third party. The term “grantor” is used to describe the individual or entity that creates a trust. The assets of the grantor are transferred to the trust so that they may be managed by the trustee and eventually dispersed to the recipients of the trust. The trustee’s duties include managing the trust in accordance with the terms of the trust agreement and in the best interests of the recipients.
The use of trusts is common in estate planning because they lessen the burden of inheritance tax, prevent costly and time-consuming succession procedures, and allow for more control over how assets are distributed to heirs. Since the size of an individual’s inheritance at death is used to calculate the amount of federal estate tax owed, transferring assets into a trust in advance of death can help minimize the size of an estate and the associated tax bill.
Revocable and irrevocable trusts are the two trust types most frequently used in estate planning. Both are explained below for your understanding.
Living trusts are another name for revocable trusts because they can be changed or terminated during the grantor’s lifetime. The grantor also acts as the discretionary trust’s original administrator and has the power to do things like add or remove heirs and alter how the assets are handled.
The greatest estate-planning freedom is found in revocable trusts, but asset security is not particularly well served by them. If the grantor retains discretion over the trust’s assets, debtors may petition the court to force the grantor to distribute trust assets to them.
Once the grantor passes, the discretionary trust becomes a permanent trust.
An irreversible trust has its conditions established at the time it is formed. After that time, the donor can no longer make changes. When a trust is established, the grantor’s assets are transferred to it and are no longer deemed part of the grantor’s personal estate. Thus, the assets in an irreversible trust are protected from the grantor’s and heirs’ debtors.
The grantor loses the ability to act as administrator of a discretionary trust when the trust becomes irreversible at the grantor’s death. A new administrator takes over the management of the trust. A succession court can designate someone as trustee if no replacement trustee is nominated or if the specified person is unable to serve. In order to avoid having an unknown third party manage your possessions after you pass away, it is crucial to designate a replacement administrator when establishing a revocable trust.
Ultimately, having an estate plan is the best way to protect both your assets and your beneficiaries for when you are no longer here. It takes away a lot of headaches by eliminating unnecessary time and money spent sorting out disputes. Fortunately, our professional estate planning experts are available to help you draft your Will and ensure it is safe and secure. If you are in the process of deciding how to structure your estate planning process, we highly recommend reaching out to our team for guidance. Our team of dedicated experts have the knowledge and experience necessary to make this process as smooth as possible, for people who are not comfortable navigating complex legal paperwork. So, don’t hesitate, take advantage of our expertise today!
Content provided by Paradox Media
Disclosure: This information is not intended to substitute for specific individualized tax, legal, or investment planning advice. Neither Royal Alliance Associates nor its representatives or employees provide legal or tax advice. If legal or tax advice or other expert assistance is required, the service of a currently practicing professional should be sought.