It is not strange for individuals to confuse creating a will as opposed to estate planning. Ultimately, a will is legal documentation that declares how you want the possessions that comprise of your estate to be distributed following your passing away. On the other hand, a will is just one of the documents included in a well-prepared estate plan.
An estate plan does other than just distribute your assets following your passing away. It provides instructions for your loved ones on how you wish your financial affairs and medical care to be managed should you become incapacitated or pass away. If you have a spouse, younger children, or special needs family members, your estate plan in going to provide for their care and financial support following your passing. At the end of the day, an estate plan decreases estate taxes and offers a quick, well-organized distribution of your assets.
The below sections are going to explain how a will and estate planning are different, the role a will plays in estate planning, and what other types of documentation needs to be included in a well-prepared estate plan. Those documents comprise of wills, trusts, living wills and health care powers of attorney, and financial powers of attorney.
What Is an Estate?
A lot of people know they are leaving behind an “estate” when they pass away, but what comprises of your estate? Fundamentally, your estate includes everything you own. That includes the following:
- Financial institutional accounts
- Your house or any other real estate
- Your vehicle
- Life insurance
- Your personal belongings
Subject to the state law in which you live, many debts might be collected from your estate following your pass away, which may considerably decrease your estate’s worth. Meaning that if your debts exceed the size of your estate, there are going to be no assets to distribute through your estate plan. Thankfully, when there is not enough in your estate to repay your debts, your family members typically can’t be held responsible for your debts.
Last Will and Testament
A lot of estate planning attorneys are going to tell you that your last will and testament is the steppingstones of any well-prepared estate plan. The documentation establishes your wishes for distributing your property following your passing away and who is going to take care of your minor children after the fact. The individuals or associations that are going to receive your assets under the conditions of the will are your “beneficiaries.”
Primarily, a will is a set of instructions to be adhered to by the estate’s executor, who is the individual responsible for overseeing your estate. The executor needs to be an individual you trust to carry out the will’s instructions and oversee your assets until they can be allocated to your beneficiaries. State probate courts typically supervises the executor to guarantee that your wishes are carried out.
Every state has their own guidelines, but a court is going to usually find a will to be valid when it is signed by an individual that is at least eighteen years of age and understands what it comprises of. The will should also be signed by at a minimum of two witnesses eighteen years of age. Many states allow for unwitnessed handwritten wills when it is created by the same hand as the signature.
Living Will and Health Care Power of Attorney
A living will sets out your wishes for your medical care should you become debilitated or unable to make decisions on your own because of an ailment. These are many times referred to as “advanced medical directives” and typically declares your wishes regarding life support or other life-sustaining actions when you cannot decide on your own.
A healthcare power of attorney enables you to give another individual legal authority for making critical decisions regarding your medical care. In a lot of cases, the appointed individual is given durable medical power of attorney so that individual is able to continue to make those decisions should you become debilitated. In many states, it is assumed that an individual that has healthcare power of attorney has been given durable power of attorney, but the estate plan needs to be clear on this matter.
Financial Power of Attorney
A financial power of attorney enables you to appoint an individual to manage your assets and finances for you. In many cases, the appointed individual receives durable financial power of attorney that enables them to continue making financial decisions should you become debilitated or badly ill to handle your financial matters. When you cannot make decisions on your own and have not granted an individual durable financial power of attorney, the probate court is going to appoint someone to act on your behalf should you be unable to do so.
The individual you give financial power of attorney to is legally required to act in your best interests, including:
- Handling your finances and assets in a trustworthy and rational manner
- Keeping clear of situations in which their interests is going to conflict with yours
- Retaining detailed records of their actions in your favor
Married couples sometimes assume they do not need to give their spouse financial power of attorney since a lot of their assets are jointly held. On the other hand, it is not unusual for a medical emergency to quickly deplete the money in a couple’s shared bank account, in which each spouse has the right to withdraw funds. Not having financial power of attorney, a spouse might be unable to access things such as 401(k) accounts held in your name or accounts that necessitates each spouses’ signatures. In addition, many state agencies are going to require power of attorney to request benefits on behalf of a debilitated spouse.
Using Trusts for Estate Planning
Whereas you can establish a trust to hold your assets on your beneficiaries behalf in your will, a lot of people decide to establish trusts through individual documents. Additionally, devising separate trusts enables its assets to transfer outside of probate and may decrease the inheritance taxes that are due.
What Is a Trust?
Trusts are a type of fiduciary relationships where one party imparts another party (called a “trustee”) the right to possess assets and/or property for the benefit of a 3rd party. The individual or association establishing the trust is referred to as the “grantor.” The trusts purpose is to safeguard the grantor’s assets by placing them in an independent trust establishment and provide for them to be allocated to the trust’s beneficiaries. The trustee is responsible for acting in the beneficiaries best interests and managing the trust in a way according to the trust agreement.
Trusts are usually used in estate planning since they decrease the amount of estate tax that needs to be paid, bypass the time and cost of probate proceedings, and oversee the allocation of assets to beneficiaries. Due to the federal estate tax being levied based on the size of an individual’s estate when they pass away, placing your assets into a trust prior to you passing away decreases the size of your estate and the amount of tax that needs to be paid.
Revocable Trusts and Irrevocable Trusts
The two kinds of trust commonly used for estate planning intentions are revocable and irrevocable trusts. Each are looked at in more detail in the following.
Revocable Trusts (Living Trusts)
Revocable trusts are usually called living trusts since they can be altered or revoked throughout the grantor’s lifetime. The grantor also acts as the revocable trust’s primary trustee and has the power to do things such as adding or removing beneficiaries and modifying how the assets are overseen.
Whereas a revocable trust provides maximum adaptability in estate planning, it does not provide much asset safeguarding. Because the grantor still has the power of adding or removing assets from the trust, their creditors can petition a court for the removal of the assets out of the trust and pass it to them.
After the grantor passes away, the revocable trust turns into an irrevocable trust.
The conditions of an irrevocable trust are put in place when the trust is originally created. It can’t be altered after it is created, even when the grantor attempts to do so. The grantor’s assets are transferred to the trust when it is created, and the assets are no longer deemed their property. That means the grantor’s creditors and the beneficiaries have no access to any assets held in an irrevocable trust.
When a revocable trust turns irrevocable at the time of the grantor’s passing, the grantor can no longer act as a trustee. A replacement trustee takes on responsibility for overseeing the trust. When no replacement trustee is appointed, or the appointed individual incapable of serving, a probate court can appoint an individual as trustee. That makes it crucial to appoint a replacement trustee as you create a revocable trust when you don’t want someone you don’t know managing your assets.
More Questions? Get in touch with a Lawyer
When you have more questions about what needs to be included in your will or your estate plan, you should get a hold of a local estate planning lawyer to find the options that are going to work best for you. An experienced lawyer can help you create a plan that provides protection to your family and any assets you wish to pass on to them.
J.P. Finet, J. D. (2021, October 7). The most important differences between Wills and estate planning. Findlaw. Retrieved March 10, 2022, from https://www.findlaw.com/estate/planning-an-estate/the-most-important-differences-between-wills-and-estate-planning.html
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