Preparing for your passing is an essential part of caring for your surviving family members. This preparation can feel overwhelming and arduous under the best circumstances, even if you feel you are far from the end of your life. Do you need estate planning vs. a will, or will one or the other suffice?
While a will is a single document, an estate plan consists of many documents and is a great deal more thorough. For this reason, many people prefer to go with estate planning considering that a will can be a part of a comprehensive plan.
For more information on the differences between these two types of preparations, here is what you need to know.
What is a Will?
A last will and testament, most often known as simply a will, is a crucial piece of any estate plan. You may create a will on its own, but it is more often part of a robust estate plan. Wills are there to detail how you want your property to be distributed upon your death. It will be given to your beneficiaries, such as surviving members of your family or friends.
In other words, a will is a set of written instructions detailing how your executor will carry out your last wishes.
What is an Estate Plan?
An estate plan is a more comprehensive way to plan what will happen to your assets after your death. Unlike a will, which is just a single document, an estate plan encompasses several documents.
Most people will leave behind checking and savings accounts, investments, homes, and even life insurance properties in addition to their personal effects. With all of these pieces in mind, an estate plan helps people make sense of what they are leaving behind for the people they love.
Some of the most important pieces of a thorough estate plan include:
- Your will
- Trusts
- Power of attorney (in the event that someone else needs to sign on your behalf)
- Advance directives (in case you are unable to make decisions on your own)
Especially when it comes to a power of attorney, there are a couple of types that you may want to consider issuing. A financial power of attorney allows someone else to take control of your finances and assets if you cannot, while a healthcare power of attorney allows someone else to make health decisions on your behalf. Both are important parts of a detailed estate plan.
To this end, trusts are one of the most important aspects of estate planning. Putting your assets into a trust could possibly reduce the taxes that your surviving beneficiaries will need to pay. Plus, it reduces the time and expense of probate proceedings while helping to distribute the estate to all of your beneficiaries.
Many people hesitate at the prospect of forming a trust because they feel that their estate is not big enough to benefit from this money move. If you’re not sure whether you should create a full estate plan vs. a will by itself, the truth is that estate plans are for everyone. All families and individuals can benefit from trusts, regardless of the size of the estate.
Common Types of Trusts
That being said, there’s no one-size-fits-all approach to trusts. For the most part, there are a few types that you should know about: living trusts, irrevocable trusts, and charitable remainder trusts.
Living Trust
A living trust is great for those who may want to make modifications to the trust during their lifetime. This means that you will be able to alter the arrangement of the assets and add or even remove your beneficiaries. It is a highly flexible and fluid arrangement that suits many people who are in the early stages of estate planning.
The downside to a living trust is that creditors may request that assets be removed from the trust in order to cover debts. This can take a sizable chunk away from your beneficiaries if it comes down to it. While it may be worth it to you in order to have the flexibility to alter your estate plan in regards to your trust, there are some drawbacks to consider.
Upon your death, it will transform into an irrevocable trust which we will dive into next.
Irrevocable Trust
An irrevocable trust is much less flexible than a living trust. Under this arrangement, all of the terms are set when the trust is created and cannot be changed.
Assets are moved into the trust and are not considered the property of the creator or grantor anymore. This prevents creditors from trying to seize these assets to cover debts, an important distinction from living trusts. Irrevocable trusts carry several tax benefits as well.
Charitable Remainder Trusts
Charitable remainder trusts (CRTs) are a type of irrevocable trust. Unlike other trusts that may only distribute assets after your death, charitable remainder trusts will provide annuity payouts to you and your beneficiaries. These are based on a certain percentage of the trust. When the funds and assets are mostly depleted, the remaining assets in the trust will be granted to a charity of your choice in accordance with the charitable remainder 10% rule.
This is a great way to give back to a charity that meant a great deal to you while still providing for your beneficiaries in the here and now.
Protect Your Estate’s Future
You should be able to rest easy knowing that your beneficiaries will be taken care of after your passing. Estate planning and creating a will are key aspects of resting assured that this will indeed be the case, and Magellan is here to help. Our team of trained professionals can assist you with estate planning and setting up a charitable remainder trust so that you can take advantage of the benefits and have peace of mind. Contact us today to learn more and get started.