Estate planning vs wills – what’s it all about? When setting up the ideal estate plan, it helps to have basic knowledge of how estate plans are structured before talking to a professional. Estate plans are not exclusive to the rich and famous, and they need not be complicated.
The average estate plan begins and ends with a single purpose – to take control over how, when, and to whom your belongings will be distributed upon death.
What is an Estate Plan?
An estate plan is a large collection of provisions, documents, deeds, and legal steps taken to ensure that your will is done – specifically with regard to your dependents and your belongings.
An estate plan effectively allows you to decide who assumes ownership and control over what you owned in life, as well as make plans to prepare for your death.
Estate plans also allow you to ensure that your loved ones are taken care of, from setting aside ironclad trust funds, to naming your preferred guardian for an underaged child.
For larger estates, planning ahead becomes more than just a matter of convenience – it becomes a matter of cost efficiency. Wealth preservation can be a serious issue in certain states, and the federal tax on bequeathment is sizeable as well. An estate plan can help breadwinners with a significant net worth in assets and properties plan their estate in a way that minimizes losses and maximizes what’s left for their next of kin.
Writing a will is inarguably one of the most important steps in any estate plan. The last will and testament is the lynchpin document that outlines who gets what after probate.
While a will is not the only way to bequeath assets, it is often the most efficient. Other ways are important for reasons such as asset protection, minimizing taxes, and dealing with foreign or faraway assets.
After the will, other common estate planning elements include:
- Naming a guardian for your dependents.
- Establishing an executor for the estate.
- Creating trusts to protect select assets and manage wealth before and after death.
- Funerary arrangements.
- Updating beneficiary designations on accounts and assets such as 401(k)s, IRAs, and life insurance policies.
- Annual charitable donations to reduce your taxable estate.
- Assigning durable powers of attorney to manage your wealth and healthcare in advanced age.
- Creating an advance directive.
- And more.
It is highly recommended to work with a professional when setting up an estate plan.
Not only will a professional help with the legal legwork involved in creating valid estate planning documents, but their advice and expertise can help you translate your wishes and ideas into action and figure out the best way to leverage existing estate planning techniques for your needs and circumstances.
Estate Planning Without a Will
While the last will and testament are considered the core document of nearly any estate plan, there are other ways to bequeath assets to your loved ones.
Trusts are legal entities created and defined by carefully drafted trust documents, which include information on:
- What assets the trust consists of.
- Who will manage the trust in your absence.
- Whether the trust is revocable or irrevocable.
- The names of the beneficiaries of the trust.
- Detailing the trust’s purpose over time.
- And more.
Trusts are defined and created by the trustor, managed by the trustee, and paid out to the beneficiary. Trusts can be funded with assets, accounts, properties, and other financial instruments.
However, unlike wills, which simply determine who gets what, a trust is an active legal entity. That means it must be continuously managed by a respective trustee, whose task it is to ensure that the trust fulfills its purpose, and is eventually dissolved. This makes trusts more costly for the simple bequeathment of assets. Where a trust becomes superior to wills is in their ability to:
- Bypass the probate process.
- Protect assets from creditors.
- Reduce the size of a person’s taxable estate.
- Create a fund to handle pay-outs to your family members for years.
- Avoid a conflict of interest for people in public office through blind trusts.
- Hold certain assets and property in trust until a beneficiary has reached a specific milestone, such as reaching the age of maturity, graduating college, or setting up their first business.
- And more.
Consult a financial advisor and estate planning professional on the benefits and caveats of a trust for your estate.
Why A Will Is Still Recommended
Because trusts require active management, and trustees require certain compensation, many estates are better served distributing the bulk of their worth between a person’s next of kin via a well-written will.
Of course, the will itself is just one piece of a greater puzzle. Naming the right executor to manage and fulfill your will is just as important. As with trustees, there is a paid human element to successfully executing this part of the estate plan – but unlike trustees, executors of a will are only tasked with managing the contents of the estate for the period of the probate process, rather than the entirety of the trust’s lifespan.
Be sure that you have full confidence in the integrity and competence of your executor. Their role is among the most important in translating all the legal prep work into real world results.
Do You Need Other Estate Planning Documents?
As mentioned previously, estate plans are about more than just bequeathment. They allow you to grant decision-making powers to your loved ones, ensure that your financial legacy is secured in the final days, and help you provide guidance on your values and interests with regard to specific medical procedures and life-saving measures.
But whether any of these apply to your needs and circumstances depends on many things. For example, an advance directive helps when you know beforehand what procedures your family would likely be asked consent for, given a chronic or ongoing illness.
Aside from distributing material wealth, estate plans can be used to name guardians for your children, bequeath certain powers over your financial and healthcare decision-making before death, and assign important roles to trusted individuals to smoothen the process after you die.