What you should know about estate planning: Wills and trusts
A well-thought-out estate plan can give you reassurance and confidence that your money, home and other assets will be distributed according to your wishes — and a will and trust are two important components of that.
Learn about the different types of wills and trusts for estate planning, and how they can help you achieve your estate planning goals.
In this article:
A will is a key element of your estate plan. It allows you to specify who will administer your estate, who will care for your minor children and how your assets and property will be distributed after your passing.
Wills have several advantages to consider during your estate planning, including the following:
- Avoid intestacy.
Without a will, state intestate succession laws can determine what happens to your property. In many cases, your property will be distributed among your closest blood relatives in proportions dictated by law, regardless of whether you agree with the decision. Intestacy may also result in your estate owing more taxes than it would if you had created a valid will.
- Distribute your property the way you want.
A will allows you to leave bequests, or gifts, to anyone you want, including a surviving child, spouse, friend, relative or charity. You can make specific bequests (e.g. jewelry, furniture, cash or a family heirloom), general bequests (e.g. a percentage of your property) or a residuary bequest of what’s left after your other gifts.
However, there are some limits on how you can distribute property using a will. For example, your spouse may have certain rights with respect to your property, regardless of the provisions of your will.
- Nominate a guardian for your minor children.
In many states, a will is the only way to designate a legal guardian for your children. With a will, you can name a personal guardian and a property guardian (which can be the same person or different people). A personal guardian takes personal custody of the children, while a property guardian manages the children’s assets.
Although a probate court has the final say, the courts generally approve the choice of a guardian unless there is a compelling reason not to.
- Nominate an executor.
An executor is the person who acts as your legal representative after your death. Some of their duties include collecting your assets, locating your will, paying taxes owed by your estate, paying creditor claims and distributing the remaining assets to your beneficiaries.
Like nominating a guardian, the probate court has final approval but will usually approve of whomever you nominate.
- Create a testamentary trust.
When your will is being probated, your will can activate a testamentary trust. The will outlines the terms of the trust, including who is the trustee, who the beneficiaries are, when the trust ends, how the trust should be funded, and how the distributions should be made.
Testamentary trusts are especially common for surviving spouses or minor children who cannot manage assets themselves or are disabled.
A living will outlines the type of medical care that you do or do not want in the event that you are alive, but unable to communicate your wishes or express consent.
Creating a will can help you manage taxes and other related costs. For example, you can take advantage of the unlimited marital tax deduction. This deduction states that if your spouse (who is a U.S. citizen) survives you and your will dictates that your estate be left to them, your property typically will not be taxable.
However, without a will, your estate may be distributed according to intestacy rules. This means that if your property is distributed to anyone except your spouse, a portion of the property may be subject to estate taxes.
Probate is the process of administering and proving a will in a court-supervised setting. All assets distributed through a will are subject to probate.
This can be time-consuming and expensive, depending on a number of factors:
- State probate laws
- Tax issues
- Challenges to the will or its provisions
- Creditor claims against the estate
- The size and complexity of the estate
- The state court system
If you own property in more than one state, your will can be subject to multiple probate proceedings, also known as ancillary probate.
In most cases, real estate is probated within the state it is located, and personal property is probated within the state in which you reside at the time of your death.
A will can be challenged, or contested, in court. This typically happens due to a disinherited heir or an unhappy beneficiary. Some of the most common claims are:
- The will was forged or improperly executed.
- You did not have testamentary capacity when you signed the will.
- You were unduly influenced by someone else when you created the will.
- The will was revoked.
Wills can be complex, but you don’t have to navigate the process alone. An Ameriprise financial advisor can provide guidance along the way to give you peace of mind during your legacy planning.
A trust is a legal entity that allows you (the grantor) to grant assets to another person. Any kind of asset can go into a trust, including cash, stocks, bonds, real estate, artwork and insurance policies.
Trusts aren’t just for the wealthy; they can be created by anyone who wants to oversee how their assets are managed during their life and after their death.
The type of trust(s) you choose for estate planning is based on your goals. For example, if you want to provide for your family after death, you may wish to provide for a testamentary trust or use, establish and fund a revocable trust during your life. A revocable trust can reduce probate costs, make assets available to your heirs more quickly and provide greater privacy for yourself and beneficiaries. If you don’t want your family to worry about estate taxes, a special trust can be created and funded with a life insurance policy or other assets that can cover those costs. An attorney can help determine what type of trust fits your situation and wishes.
To establish a trust, you first need an attorney. You must also name beneficiaries who are entitled to benefit from the trust. Your beneficiaries can be family members, friends and charities. Based on your wishes, those beneficiaries may have access to the principal of the trust during your lifetime or after you die, and they may also receive income from the trust.
You must also name a trustee when setting up a trust.
A trustee is the person responsible for administering your trust, managing the assets and distributing income and/or the principal according to the trust’s terms. Depending on the goals you want to achieve with your trust, the trustee can be yourself, another person or an institution (e.g., a bank). You can also name more than one trustee. Because of the complexity and importance of a trust, the trustee must act in the best interest of the beneficiaries.
You can help determine your trustee’s duties within the trust, although many of their duties are established by state law. Some of the duties of a trustee include:
- Protecting, preserving and investing the trust assets for the benefit of the beneficiaries
- Keeping complete and accurate records
- Cautiously invest the trust’s assets
- Avoiding mixing trust assets with non-trust assets — especially their own
- Exercising reasonable care and skill when managing the trust
The trustee can hire attorneys, bankers and brokers if they do not have the proper knowledge to uphold their duties.
One of the main estate planning advantages of a trust is determining how your assets will be managed and who will manage them. Trusts can also ease the burden on family members tasked with paying estate taxes and creditors after your death.
Consider the other following advantages and disadvantages when establishing a trust:
There are two main types of trusts to consider for estate planning: living trusts and testamentary trusts.
Living trusts are created and funded while you are still alive to make it easier to transfer property after your passing (e.g. your house, investments, a boat). Property passed through living trusts is not subject to probate, unlike the property in your will. This means that your assets will not be held up during the probate process, so the trustee can transfer those assets to beneficiaries whenever you decide.
For example, if you wish to hold the assets until a beneficiary reaches a certain age or gets married, the beneficiary will not receive those assets until that time.
Living trusts can be revocable or irrevocable. You can change or dissolve your revocable living trust after its creation. Irrevocable living trusts cannot be easily changed after creation. However, irrevocable trusts can be valuable when estate planning because they can diminish your tax liability.
A testamentary trust is created at your death with terms within your will. Testamentary trusts do not come into existence until after your will has been probated.
After your will is probated, selected assets passing through your will can go into the trust. Afterward, the testamentary trust functions like any other trust. You can determine how the assets within the trust should be managed, and how they are distributed within the terms of the trust. This helps give you control of the assets after your death.
Testamentary trusts are irrevocable and cannot be changed once created.
The purposes of a will and a trust for estate planning are quite similar — but the key difference is when they activate. Though you can have both, a will takes effect only after your death (alongside a testamentary trust), whereas a living trust becomes active immediately after creation.
Other differences include:
Ameriprise Personal Trust Services
Ameriprise offers personal trust services to help you ensure the legacy you desire is carried out according to your wishes. We support your trust using our administrative and accounting and tax reporting services.
Prepare your will or trust
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