Planning for your long-term financial life must also include the reality that at some point we all pass away. With this in mind, one of the more important documents that you should have in your financial planning file is a will or a trust. While the two terms tend to be used interchangeably, they are different instruments.
What are the Pros and Cons of a Will?
A big benefit of a last will and testament is that it’s simpler to write and less expensive. One popular legal website will assist you starting at $69 while other websites provide you with do-it-yourself forms for free.
There is a possible drawback to wills in that in many states, when the writer of the will passes away, it may be required to go through some form of probate. According to nolo.com, “Probate takes a long time, can be very expensive, (but) for most estates, isn’t necessary.”
A will is doubly important if you have minor children. With a will, you can decide who is going to manage their inheritance and you can choose the age at which you want assets to be distributed to them. More importantly, the will is the document in which you name a legal guardian for your children.
If an individual passes away without a will, a state’s so-called “intestacy statues” come into play and the probate court takes full responsibility for distributing the deceased’s property without any guidance based on his or her wishes. This can lead to unintended problems such as an intra-family conflict between siblings that results in bitterness and legal challenges.
The bottom line is, even if you don’t have a lot of assets, you may want to ensure that your property goes to the people who you want to receive it and that your minor children are cared for. You can do this with a last will and testament – well worth the peace of mind and few hundred dollars it may cost to create it.
What are the Pros and Cons of a Trust?
A living trust has three parties: a settlor, a trustee and a beneficiary. The settlor is the person(s) who creates the trust and whose assets are in the trust; the trustee is the person who manages the trust and oversees distribution of the assets upon the settlor’s death; and the beneficiary(ies) is the person or persons who inherits the assets. The settlor can also serve as the trustee as long as he or she is alive.
The most common living trust is a revocable living trust, which means it can be changed at any time by the settlor. Unlike a will, a revocable living trust is a private document and as such would not go through probate. A trust can be more expensive than a will due to the complexity of the document coupled with the necessity of transferring property such as real estate and securities into the trust, which is referred to as “funding the trust.”
Due to its more complicated nature, it might be smart to have an attorney involved in creating the trust if you can afford it. Otherwise, there are online forms available so you can do it yourself.
Upon executing your trust and placing assets in it, you continue to have all the benefits of your assets such as your home without legal issues regarding your ability to control and use – or sell – the assets. Like a will, the trust allows you to establish directions when minor children will be entitled to receive any of the assets and to name a trustee to manage the inheritance until they can competently manage it themselves.
Finally, when the settlor dies, full control of the estate automatically passes to whomever he or she has selected as the trustee to oversee distribution of the assets without any probate or other legal interference. Also, at that point, the trust becomes irrevocable – in other words, it can no longer be changed and thus its terms must be carried out by the trustee, whose job it is distribute the assets and follow other instructions in the trust to the letter.
Regardless of which path you choose, it is particularly important to plan for the unpleasant-to-contemplate possibility of passing away before your children reach adulthood to ensure they are financially covered.