When should you start estate planning? What does family estate planning involve, and how do you decide between a trust and a will? What are the different types of trusts?
It’s no wonder why people find the estate planning process so daunting. To help you on your journey, this article demystifies some of the key steps and considerations that go into making an estate plan. You’ll also learn why it’s important to start planning early.
Writing a will
You’re likely already familiar with the basics of a last will and testament. This document outlines how you’d like your assets to be distributed upon death. Apart from asset distribution, though, a will includes several important sections, such as:
- Your name and a declaration that this document supersedes any previous wills
- Appointment of guardianship for minor children
- Selection of an executor (and backup executor) and assigning trustee powers to those responsible for managing your assets
- Outline of beneficiaries and instructions for distributing possessions among them
You might also include provisions in the event of a beneficiary's life circumstances changing. For example, if your child is listed as a beneficiary, you could structure the will so that their spouse won’t receive your child’s inheritance in the event of a divorce.
Melissa Negrin-Weiner, Esq. – a senior partner with Long Island-based firm Cona Elder Law – notes that “The importance of a will can vary with age. For example, younger couples with minor children must make sure they appoint a guardian for those children should something happen to both parents. Older individuals may be more concerned with passing along a family heirloom or piece of personal property.”
This is one reason why updating your will is just as important as setting it up in the first place. Before you talk to an estate attorney, think about what you want your will to do. Once you have a clear idea of how you want to distribute your assets, a professional can help you translate those preferences into legal language.
An often-frustrating part of executing a will is the probate process – a long and often expensive court process for “proving” a will. Because this isn't a private process, assets and their beneficiaries are public knowledge.
Negrin-Weiner points out that naming beneficiaries on assets like IRAs and creating joint accounts is one way to skirt this cumbersome process. “Typically, when one joint owner passes away, the property or account automatically passes to the other owner without any need for court involvement. And naming beneficiaries on accounts such as transfer on death (TOD) or in trust for (ITF) allows for those accounts to pass to the named individual immediately.”
She says another common way to avoid probate is through a trust.
A closer look at trusts
A primary difference between wills and trusts is that wills define your wishes for after you pass, while a trust is initiated while you’re still alive. In a trust, a grantor places an estate under the management of a trustee who is responsible for distributing assets to beneficiaries after the grantor's death.
When choosing between a will and trust, the size of your estate may be one of the biggest determining factors. Generally speaking, for those with assets that exceed $500,000, a trust is more advantageous. That’s because setting up a trust has fixed costs, so the benefits increase with a larger estate. On the other hand, if the estate has less than $200,000 in assets, a will is typically the better financial choice.
Even so, for many it comes down to personal experience and preference. For those with a smaller estate who’ve had a negative experience with probate, they may still prefer to set up a trust. If you’re considering a trust, you’ll want to work closely with an estate planning attorney to understand which type of trust best suits your individual needs. Some estate lawyers would even advise that you don’t choose between a will and a trust, but use a combination of the two to ensure all of your assets are covered.
To help you prepare, we’ll go over the two most common types of trusts: revocable and irrevocable trusts.
Revocable trusts: Retaining control and flexibility
Revocable trusts, also known as living trusts, are established while the grantor is alive and mentally fit to continue managing assets. By naming themself and their spouse as trustees, a grantor can continue to sell, trade or acquire assets within the trust.
It’s still important to designate beneficiaries, though, as they’ll receive the assets when the grantor passes – at which point the trust becomes irrevocable. Beneficiaries may also be called to manage assets if the grantor is no longer able to do so themself.
While it may be tempting find a quick solution to navigating the challenges of setting up a trust, AARP warns against generic living trust kits found online, which are unlikely to fit individual circumstances. If you're considering setting up a trust, work closely with an attorney who can customize the document to your specific situation.
Irrevocable trusts: Protecting assets and avoiding taxes
Negrin-Wiener notes that while a revocable trust can help your family avoid probate and limit disagreements between family members, it won’t protect you from creditors or lawsuits. An irrevocable trust, on the other hand, is often used to protect assets so individuals can apply for Medicaid benefits without spending down their assets on long-term care.
Unlike a revocable trust, an irrevocable trust cannot be altered by the owner unless all beneficiaries agree. Numerous state-specific laws govern this type of trust, making it essential to collaborate with an estate planning attorney to ensure compliance with all requirements.
While relinquishing control over assets is a drawback, there are advantages in certain situations. The benefits of an irrevocable trust include:
- Protection from taxes: As the assets no longer belong to the grantor, the estate becomes shielded from some estate taxes
- Avoiding probate: As previously mentioned, probate can be expensive and delay asset distribution to beneficiaries
- Asset reduction: This isn’t just about evading estate taxes – certain government assistance programs have maximum income thresholds for eligibility; placing assets in an irrevocable trust may enable the grantor to access services they otherwise couldn't afford, such as long-term care
According to the American Council on Aging, older adults applying for Medicaid long-term care generally have an asset limit of approximately $2,000. However, higher valued assets like primary residences, wedding rings and vehicles may be considered exempt. Nevertheless, individuals exceeding the asset limit often still struggle to cover the cost of care. An irrevocable trust helps older adults protect their assets, such as a home, while seeking financial assistance for their care.
It's important to note that establishing this type of trust doesn’t protect your assets if you require immediate care. Medicaid enforces a five-year “look-back period,” which considers assets transferred to a trust within the last five years as viable for covering care costs. However, if you are in reasonably good health and don't anticipate requiring skilled nursing care within the next five years, an irrevocable trust can safeguard your assets should the need arise.
Ultimately, working closely with your attorney can help you understand if a revocable or irrevocable trust is the better fit for your situation. In addition to staying in compliance with state regulations and requirements, Negrin-Weiner points out that a knowledgeable attorney can help you make the most of whichever type of trust you choose. “A carefully drafted irrevocable trust does allow for flexibility in your asset protection plan,” she says.
The importance of estate planning
Regardless of whether a will or a trust is a better fit for your situation, there are many reasons to put a plan in place for the future of your estate.
First, life is unpredictable. If you pass without a legal document clarifying your wishes, your assets will be distributed according to state laws, which may not align with your preferences. Moreover, without clear instructions, survivors are left guessing your intentions.
Negrin-Weiner says, “Preparing your will or trust well before a healthcare crisis ensures that your wishes will be carried out and that you will be able to preserve your hard-earned assets.”
Perhaps one of the best indicators of a successful estate plan is avoiding family conflict. Anything you can do to provide clarity and guidance will help alleviate grief, greed and unresolved childhood dynamics.
More information
In addition to award-winning senior living, Atria offers helpful resources on many aspects of retirement. Contact your local Atria Senior Living community for more information on estate planning services in your area.
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