Will and Trusts
Mark Twain once said, "Thrift is a wonderful virtue, especially in an ancestor." Indeed, the $10 trillion poised to exchange between generations over the next decade promises to make such affluent terms like "wills" and "trusts" buzzwords for the masses.
Making of will
A will basically names the executor of your estate and instructs how you want your assets disseminated among heirs. It can be as simple or as sophisticated as you wish, but it must be a written document. Videotaped wills are not legally binding. A will must be dated, signed, and witnessed in order to be properly executed.
A will empowers you to leave your assets to your exact requests. Failure to create a will mean the division of your assets will be decided by a probate judge instead of you. The following are significant points to remember when drafting a will:
- If your assets are spread out across different states, your will may be subject to probate in each state involved
- Always ask your named executor to accept the responsibility when you draft the will; don't just assume they want the job
- Name back up executors in case you both happened to be killed in the same car wreck, or other similar circumstance
- You must specifically state in your will if you wish to disinherit certain relatives, such as your children. Otherwise, the state may assume you forgot to include them in the will and may grant them an inheritance.
A trust gives fiduciary control of specifically assigned assets to a person or institution for the benefit of beneficiaries. Fiduciary control implies that the trustee-not the beneficiary-has the legal authority and duty to make decisions regarding financial matters on behalf of the beneficiary.
Trusts are more popular than ever, thanks to today's complicated family networks of multiple ex-spouses and stepchildren. Three main reasons people set up trusts are for:
- Estate planning. To remove assets from the estate to avoid estate taxes upon the owner's death.
- Management issues. To retain ownership of assets but have the need or desire to assign a trustee to handle money, pay bills, etc. due to the failing health, incapacitation, or special needs of children, etc.
- Asset protection. Someone with a high net worth or in a high risk profession (such as a doctor) may wish to transfer assets into a trust to protect his wealth against litigation from future creditors, angry ex-spouses, malpractice suits, etc.
Revocable or irrevocable?
There are several different types of trust that can be established. The two most common are revocable and irrevocable. Here's the difference between the two:
- Revocable. The trust may be changed or revoked during the owner's lifetime. Because of the flexibility allowed, trust proceeds do not avoid estate taxes upon the owner's death.
- Irrevocable. The trust may not be changed during the owner's lifetime. In exchange for giving up control of the trust assets, proceeds avoid estate taxes upon the owner's death.