Quick Guide to Living Trusts, Wills, and Power of Attorney & how They Benefit Your Future Finances
Feb. 7, 2018
When someone dies with or without a will, their estate must pass through probate, a public court-supervised process of asset distribution to beneficiaries and heirs. The ability to skip probate stands out as the major benefit of establishing a trust.
If the deceased party had established a trust before death, asset distribution skips probate. Beneficiaries must pay income taxes on inheritance distributed from a living trust for the fiscal year it is received. Estate planning begins with choosing the appropriate asset management tool. You'll need to choose between the following tools to manage and protect your future finances:
Revocable Living Trust
Irrevocable Living Trust
Power of Attorney
Each has positive and negative aspects, and proper asset protection may require a combination of tools.
Learn About Revocable and Irrevocable Living Trust
Trusts are private contracts between a “truthmaker” and a trusted entity. You may establish either an irrevocable or a revocable trust. In an irrevocable trust, the creating party turns over property and asset ownership to the trust permanently. The party cannot amend or revoke this trust agreement once created. Why choose such an ironclad tool? Once a party places the property in an irrevocable trust, the trust owns it.
Those who work in risky careers that could spawn lawsuits have protected their properties by placing them in trust. Creditors can't touch properties in an irrevocable trust since the trust, not the sued individual, owns the property. The property remains protected for the party's heirs. It also reduces your estate tax bill. Property placed in this type of trust doesn't contribute to the party's gross estate value. Assets placed in an irrevocable trust don't count toward your assets when qualifying for Medicaid or Supplemental Security Income. Designed properly, it can also protect assets for a special needs child while ensuring they can qualify for government benefits.In a revocable trust, the creating party places property and assets in trust but can reclaim them at any time. As long as the creating party remains mentally competent, they can amend the terms. It doesn't protect the trust assets from a lawsuit or estate taxes, and they may count when calculating assets for government benefits qualification. The person creating the trust usually serves as its trustee and manages its assets.
A successor trustee manages assets after the trust's creator dies. The successor settles the estate, distributing its assets to its named beneficiaries. At the time of the death of the trust's creator, it becomes irrevocable. The main advantage of this type is probate avoidance. Preparation for the possibility of mental incapacitation denotes another important advantage. It allows the creating party to establish criteria for certification of mental incompetence or a comprehensive disability plan. When incapacitation or disability occurs, the successor trustee takes over as the trust's manager. You may include a power of attorney that allows the successor trustee to manage your affairs and your specific healthcare needs and decisions.
Information on Creating Wills
Although attorneys call a last will and testament “the most basic” estate planning tool, it holds many advantages over trusts. For instance, unmarried couples and same-sex couples can use a will to grant rights, property, and assets to their partner. A will provides the flexibility that trusts do not. Examples of matters one can specify in a will include:
Child rearing requirements
Name a guardian for minor children
A will becomes public record when submitted to the probate court. The estate itself incurs estate taxes and the beneficiaries must pay income taxes and inheritance taxes. Creating a will and power of attorney lets you manage property distribution and personal needs.
Determining the Right Tool to Use
A combination of tools best serves all needs. While a trust can administer property, a will covers omitted property and personal needs, such as the care of children and pets after death. Protect your future finances with legal tools that allow easy distribution of property. Talk to an attorney to determine the right type of trust.
Charitable lead trusts
Charitable remainder trusts
Irrevocable life insurance trusts
Grantor retained annuity trusts
Qualified personal residence trusts
Spousal lifetime access trusts