Lisa Stickler 2016-01-21 15:13:40
There are certain conversations each of us must have. One such involves estate planning—specifically, how to decide whether your estate will be distributed via a will or a trust. According to the American Bar Association (ABA), 55 percent of Americans die without a will or estate plan. Laurie Murphy, an estate planning attorney at Miller Johnson, emphasizes that when choosing the vehicle by which your assets will be managed, there is no one right answer. The ABA defines probate as “the court-supervised process of administering your estate and transferring your property at death pursuant to the terms of your will.” The probate process can be expensive and lengthy, taking anywhere from five to 10 months to complete; a trust may allow you to bypass this process. WILL Murphy refers to a will as “an instruction manual for the probate court.” A will becomes effective upon the death of its creator (testator) and the subsequent filing with the probate court. Through a will, the court is told who will act as the creator’s personal representative and how the assets are to be distributed. Any assets not designated to pass through a non-probate method fall within the purview of a will. On its own, a will does not provide its creator much control over asset management. TRUST Murphy calls a trust “an instruction manual for the trustee.” Unlike a will, a trust gives the creator (grantor) extensive control over the distribution of the assets it contains. In the field of estate planning there are two primary types of trusts, testamentary and living. Testamentary trusts are found within the creator’s will, thus subject to the probate process. Living trusts are formed during the creator’s lifetime and circumvent the probate process. LIVING TRUST Katie Aguilar, also an estate planning attorney at Miller Johnson, says most of her clients utilize a living trust when creating their estate plan. While living, the creator of a trust typically serves as the trustee and beneficiary. At the time of death, a designated trustee steps in to manage the assets for the new beneficiaries. Many of Murphy and Aguilar’s clients elect to establish a living trust for two main reasons: to avoid probate and to allow for careful asset management. Trusts contain instructions stating that their assets can only be used for a specific purpose. Careful management is particularly necessary when the trust beneficiary is a minor. Many trusts also have provisions defining the age at which a beneficiary can access the funds contained within. Other common trust provisions dictate that its assets cannot be retrieved until the beneficiary completes a certain life event, such as graduation from college. Along the same lines, a living trust may be created for the benefit of disabled individuals, for those who can be easily exploited or for individuals who are not financially responsible. “Trusts are a good idea if you have someone who, for whatever reason, cannot or should not manage an inheritance,” Murphy said. Trusts also carry advantages when the creator has been remarried and has children from a previous marriage. In these situations, a trust can contain language naming the current surviving spouse as beneficiary, and the children from the creator’s previous marriage as final beneficiaries. Finally, individuals with estates in excess of 5 million dollars create trusts to reap certain tax benefits. WHAT FUNDS BELONG IN A TRUST? If you have chosen a living trust as your inheritance management tool, you must decide which assets will be used to fund it. Traditional retirement accounts should not be placed in trust. Murphy notes that the majority of our wealth is typically amassed in IRAs, 401(k) accounts and life insurance policies, all of which have designated beneficiaries and thereby require no additional estate planning determination. Additionally, significant tax consequences are triggered if these items are placed in trust. Assets that should be placed in your trust include after-tax investment accounts, certificates of deposit, real estate holdings, savings accounts, business interests and stock and bond portfolios. Real estate, for instance, is difficult to divide. A trust can set forth each beneficiary’s right to use the property and require that its proceeds be divided evenly once sold. The estate planning process is complicated. Yet fortunately, Aguilar said, “The process of creating these documents is not as daunting as many people may expect.” Consulting with a knowledgeable attorney will help ensure the responsible distribution of your assets through the most appropriate method.
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