About Estate Planning

Estate planning is one of the widest subjects within the larger topic of personal finance. The most basic tools of estate planners are trusts and wills, both of which can be complex legal topics in their own right. Financial planners and accountants often speak of the two together because the two are often used alongside one another for special purposes.

It’s helpful to begin with the basic definition of each instrument. After that, we’ll take a look at the revocable and irrevocable trust. There are many other kinds and nearly endless variations and combinations that financial planners use.

Wills and Trusts FAQs

In its most basic form, a trust is nothing more than a legal document that very precisely spells out the ownership rights of an asset. The creation of a trust brings a special relationship to life between a person called a trustee and the asset’s original owner, who’s called the “grantor.”

The main purpose of forming a trust is to eventually transfer the trust’s assets to a named beneficiary, or group of beneficiaries. A parent might hire a local bank to become the trustee for a house or bank account that is intended to go to a child at a designated time. The grantor does not necessarily have to die for the assets to be transfer.

The grantor has full control over how the assets are distributed, when they are to be distributed and how they are distributed. It’s clear to see that there are all kinds of ways a trust can be constructed. For example, a typical kind of trust is one in which parents place a sum on money that goes to a child, but only when that child reaches a certain age, usually 18 or 21. The bank, the trustee in this case, is responsible for transferring the money to the child at the proper time, whether the parents are living or deceased.

Wills are a bit less complex than trusts in most instances. Like its cousin the trust, a will is also a legal document. But while a trust creates a relationship a will simply states what a person wants to happen to his/her estate after death. A standard will lists things like a guardian for your children, as well as who you want to be your heirs and executor. The executor is the person who administers the will. Heirs receive the assets that are transferred by the will.

People who create revocable trusts and place assets in them can alter the specifics of the document, change the provisions of the trust, modify the trust or even revoke it altogether. The word “revocable” is of paramount importance in the definition. For people who own assets that they wish to keep out of probate, the revocable trust is essential. When the grantor, or “trust-maker” dies, any assets in the trust will pass quickly and seamlessly to the beneficiaries. The state, or the will of the deceased, will not get in the way of the trust’s instructions. This end-run around probate court can save huge amounts of money for an estate.

The operative word here is “irrevocable.” That means once an asset is placed into the trust, even the original owner, the grantor, cannot remove it from the trust. A person who sues a grantor, for example, cannot get at the assets in an irrevocable trust because those assets no longer belong to the grantor; they are the property of the trust. That’s why irrevocable trusts are often used as a strategy to protect large assets from collectors or other forms of legal attack.

A trust can be created for just about any reason imaginable. Some are charitable, set up specifically to deliver assets to certain organizations. There are also so-called “asset protection” versions that are carefully designed to protect against creditors, the tax bypass trust to guard assets from estate taxes, the spendthrift trust that carefully control how the beneficiary receives and uses assets, the well-known Totten trust to quickly transfer bank accounts to beneficiaries, and the special needs trust to help beneficiaries who receive payments like Social Security Disability, and many more.

In short, living wills are legal documents you create to inform others about your end-of-life wishes. Typical instructions within a living will might say, “I do not wish to be placed on an artificial ventilator under any circumstances,” or “I wish to receive palliative care is that becomes an option after I’m incapacitated,” or simply, “I wish to donate any and all usable bodily organs for use by others who need them.”

A living trust is a much more complex creature. In estate planning, it allows you to place assets into a trust and manage the trust while you are alive. A living trust provides for a successor trustee who will take over for you in the event of your death. These entities are excellent ways to avoid probate for specified assets and maintaining privacy about how your assets are disposed of upon your death.

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