An estate plan helps you manage your assets during your life and ensures they are distributed according to your wishes after your death. Here are 10 of the most common questions and answers about this process.
1. What is the difference between a will and a trust?
A will is a legal document that provides instructions for the distribution of your property after your death. It also allows you to nominate an executor (also known as a “personal representative”) to manage your estate, distribute your assets, and may also name a guardian for your minor children. A will is only effective upon your death and must go through a court process called probate to be carried out. In essence, probate is the process of proving your will or lack thereof.
A trust, on the other hand, is a legal arrangement where you transfer assets to a trustee, who holds and manages them for the benefit of a designated beneficiary. A trust can be effective during your lifetime and allows for the transfer of assets to beneficiaries without the need for probate upon your death.
2. Why do I need an estate plan?
An estate plan is essential for several reasons:
- It allows you to specify who will inherit your assets upon your death instead of letting state law decide.
- It lets you name a guardian for your minor children.
- It can help you avoid or minimize estate taxes.
- It gives you control over your medical and financial decisions if you become incapacitated.
- It can simplify the legal process for your loved ones after your death, potentially saving them a lot of time and money.
3. What happens if I die without a will or a trust?
If you die without a will or a trust, you are said to have died intestate. In this case, state law will dictate how your assets are distributed and a court will appoint an administrator to handle your estate. The distribution of your assets may not align with what you would have wanted and the process can be more time-consuming and expensive for your family.
4. What is probate?
Probate is the legal process of administering a deceased person’s estate if they die with assets in their sole name. It involves validating the will, inventorying assets, paying debts and taxes, and distributing the remaining assets to beneficiaries. This process is public and can be lengthy and costly. The primary benefit of a well-funded trust is that it helps you avoid probate.
5. What is a Power of Attorney?
A Power of Attorney (“POA”) is a legal document that gives another person, known as an “agent” or “attorney-in-fact,” the authority to act on your behalf, the “principal.” There are two different types of POA”
- A Durable Financial Power of Attorney allows your agent to handle financial matters like paying bills and managing investments while you are alive and/or incapacitated.
- A Medical Power of Attorney or Durable Power of Attorney for Health Care Decisions grants your agent the ability to make medical decisions for you if you’re unable to do so yourself.
6. Who should I choose to be my executor or trustee?
The person you choose to be your executor (for a will) or trustee (for a trust) should be someone you trust implicitly. This person will have significant responsibilities, so you should consider someone who is:
- Compatible: They must act in the best interests of your beneficiaries.
- Capable: They’ll handle legal paperwork, financial accounts, and asset distribution.
- Competent: They must be able to understand a basic level of how to administer your trust or the probate process.
- Available: They should be willing and able to take on the role. It helps if the executor or trustee resides in the same town or state as you but is not always necessary or practicable.
You can name an individual, such as a family member or friend, or a professional fiduciary, like a bank or a trust company, as your executor or trustee. It is also recommended to name a successor in case your primary choice is unable or unwilling to serve for any reason.
7. Can I change my will or trust after I create it?
Yes, you can absolutely change your will or a revocable living trust as long as you have the legal capacity to do so. In fact, it is highly recommended that you review your estate plan at least every three (3) years, or after major life events such as a marriage or divorce, the birth of a child, or a significant change in your financial situation. Changes to a will are typically made with a codicil, and changes to a trust are made with a trust amendment.
8. How much does an estate plan cost?
The cost of an estate plan varies widely depending on the complexity of your assets and your goals. A simple will can cost anywhere from a few hundred to over a thousand dollars, while a comprehensive estate plan that includes trusts can cost several thousand dollars. Many law firms offer a flat fee for a package of services, providing a predictable cost for the client.
9. What assets are part of my estate?
Your estate includes all assets you own at the time of your death, whether they are tangible or intangible. This can include, but are not limited to, the following:
- Real estate (homes, land)
- Bank and investment accounts
- Life insurance policies
- Retirement accounts (401k, IRA)
- Personal property (jewelry, art, vehicles)
- Business interests
10. Do I need an estate plan even if I am not wealthy?
Yes! An estate plan is important for everyone regardless of their net worth. It is not just about passing on wealth, but rather, it is about protecting your loved ones and ensuring your wishes are carried out upon your death. A well-drafted estate plan can help you:
- Name a guardian for your children.
- Appoint someone to manage your finances if you become incapacitated.
- Ensure your personal belongings go to the people you choose.
- Help minimize or reduce taxes