Planning for the Future

 

I Have a Will — Do I Also Need a Living Trust?

Q. I have a will, but several of my friends have estate plans where everything passes under a revocable living trust.  What is the difference between the two?

A. A will takes effect at the time of death.  It is a public document, typically filed in the probate court in the county in which the deceased resided.  A revocable living trust is a private document that takes effect immediately; it will hold and manage your assets during life, as well as distribute them upon your death.  You typically will serve as the trustee of your revocable living trust, with successor trustee(s) named to manage the trust if you are no longer able to do so, or at the time of death.

Q.  Is there a difference in cost between a will and a revocable living trust?

A.  A revocable living trust can be more expensive to set up than a simple will.  Additional fees will apply if a bank or trust company is appointed as a trustee or successor trustee.  However, since the assets of a revocable living trust pass outside of the probate process, similar to life insurance proceeds and assets in other accounts that name a death beneficiary, costs on final distribution of the trust should be much less.  Revocable living trusts may be especially helpful to people who face probate on assets owned outside their home state.

Q. If I have a living trust, do I still need a will?

A.  Yes, you need a will to dispose of any assets not placed in trust during your lifetime and to name an executor or a guardian for someone in your care.  If you do set up a living trust, it’s vital that you follow through and actually transfer ownership of your assets into the trust, along with any new investments and other assets you later acquire.

Q.  Are there tax advantages to living trusts?

A.  No.  During your lifetime, all trust income, including capital gains, will be taxed to you and any deductions will be passed through to you.  All the trust property will be included in your estate for federal estate tax purposes.

Q.  Does everyone need a revocable living trust?

A.  No.  People who live in states where probate is short, simple and inexpensive may need only a will or perhaps a will that contains a trust to oversee distributions to your beneficiaries.  On the other hand, anyone with a complex estate or who owns property in several different states may need a living trust.

Q.  Can a living trust benefit charities I support?

A.  During life, you can make charitable gifts through your revocable living trust and you will receive income tax charitable deductions on your personal tax return.  You can also make charity a beneficiary of a living trust, similar to a will, with potential tax savings for your estate.


Reviewing Beneficiary Designations

Wills and revocable living trusts are vital planning tools, but much of your estate will pass through beneficiary designations from life insurance policies, IRAs and other arrangements.  Here are some tips to keep in mind:

Understand the basics

You can name beneficiaries for a broad range of assets, including retirement plans, annuities and financial accounts.  When you designate a beneficiary, those assets will pass directly to that individual or organization; they will not need to go through the probate process, which can be costly.  Generally, if you fail to name a beneficiary, your assets will pass either according to your will or to state law, if you have no will.

Review and update your beneficiary designations

Keep in mind that beneficiary designations will override bequests directed in your will.  This is why it’s crucial to review your beneficiary designations on a regular basis, along with your will and other estate documents.  For example, Jane names her sister Sue as beneficiary of her IRA, but her will leaves the IRA to her brother Harold.  The beneficiary designation will prevail and Sue will receive the IRA.

Consider tax consequences

It’s wise to get professional advice when naming beneficiaries because some assets, especially retirement accounts and U.S. savings bonds, create income tax burdens for heirs.  People who own IRAs and other retirement accounts are often shocked to learn that a large percentage of their accounts can be lost to estate and income taxes upon death, leaving little remaining for their heirs.  However, you can leave part or all of an IRA to charity and avoid all taxes on the amount we receive.  If you want to name us as a beneficiary of your IRA, simply contact the administrator of your IRA for a new beneficiary form.


When Do I Need to Update My Will?

Is your will so old that you can’t remember when you drew it up?  Without regularly reviewing and updating it, your will could create confusion for heirs.  Recent changes in federal estate tax laws may affect your estate plan, and fluctuations in real estate and portfolio values could shortchange some of your beneficiaries.

Here are additional events that may require a modification of your will or living trust:

  • Marriage, divorce or death of a spouse
  • Birth of a child or grandchild, or a child reaching adulthood
  • Acquisition of new assets by gift or inheritance, or giving away or selling assets mentioned in your will
  • Death of a beneficiary named in your will, or changes in the needs of your beneficiaries
  • Death, disability or move of an executor or trustee
  • Purchase or sale of real estate, or relocation to a different state
  • Decision to make additional bequests to favorite charities

Ask your advisers whether or not you need to revise your will and other estate plans.  For simple changes, a codicil might be sufficient, but for more extensive changes, a new will or living trust might be recommended.


Estate Planning for Those on Their Own

Many of us know of individuals who have outlived most or all of their friends and family members.  It might be natural for such people to wonder: “Why should I go to the trouble of making a will (or other estate arrangements) if there is no one to leave my estate to?”

One answer is that, without estate planning, a person’s assets could pass to distant relatives, or even to the state where they reside.  Most people would prefer that their assets be put to a more satisfying use, such as continued assistance for the charities they supported during their lifetimes.

Estate planning, broadly defined, should cover a variety of end-of-life issues.  It’s important to seek out a trusted adviser who can help you:

  • make or update your will;
  • plan beneficiary designations on life insurance, retirement plans and financial accounts;
  • plan for someone to handle financial matters if you become disabled, through a general durable power of attorney or revocable living trust;
  • arrange for healthcare decisions if you are incapacitated, through a living will and/or a healthcare power of attorney.

We can provide language for your attorney to use when drafting your estate plan in order to include a thoughtful bequest to continue your support.