There are four ways you can pass property to your loved ones:
- Will
- Trust
- Joint Property
- Certain types of contracts
Each of these documents or legal arrangements has advantages and disadvantages. Some documents are easier to create now, but are more expensive for your family and loved ones after you are gone. Other documents are more challenging to create now, but will save your family and loved ones a substantial amount of money later.
A will is the easiest and cheapest estate-planning document to prepare. Most people can create their own will without hiring a lawyer. After you are gone, you will must be probated. Probate is a process whereby your loved ones must petition the local probate court, open a probate file, administer the property pursuant to your state's probate code, and then distribute the property. It's almost impossible for a family to probate a will without hiring a lawyer. Probate is like a lawsuit. There are detailed court rules and forms required to effectively probate a will.
A will may be the document of choice for a young family for several reasons. The first reason is that a will is the only document that allows you to name a guardian for your minor children. It is not necessary to name a guardian if there is a natural parent living. If both natural parents are gone, a will gives you the opportunity to choose the person or persons you would like to raise your children. If you do not have a will and both natural parents are gone, the probate court will conduct hearings to determine who should serve as the legal guardian of your minor children. A person who petitions the court to serve as legal guardian may not be the person you would have chosen had you prepared for this eventuality in advance.
The second reason a young person or family might choose to have a will rather than a different document or legal arrangement is because a will is easy and inexpensive to prepare. If you do not have a will, every state has a law that directs how your property will pass when you are gone and this distribution may not if with your intentions.
If you are older, you may choose to have a will because your affairs are not complex, but you want to make sure that your property passes to the loved ones of your choice. If you are not concerned about the expense of distributing you assets when you are gone, a will is an excellent estate-planning document.
Disadvantages: Due to probate, there are additional costs and delays associated with using a will. However, if you have a will, at least you have left instructions about how you would want your property distributed.
With a trust, your property will be distributed according to the instructions you place in the document. But the added bonus is that your loved ones will not have to use the probate process, saving them a tremendous amount of money and time.
You may also choose to use a trust because you don't want your property distributed immediately when you are gone. Creating a trust allows you to establish a management plan for your family. Assets in a trust are distributed according to a predetermined schedule.
There are many reasons why you might not want your property distributed right away. You many be concerned that your spouse is not capable of managing the property, or if both you and your spouse are gone, your children will be too young to receive your property. You many not want the legal guardian of your children to have control of your property. Or perhaps you are worried that your children's creditors or spouse will try to lay claim to your property when you are gone. A trust allows you to protect against all of these risks.
Many people think you have to involve a bank in order to have a trust. This is not true. You can serve as trustee while you are living, then choose a family member or other loved one to serve as trustee after you are gone.
You can place instructions in the trust document that will guide your trustee on how to manage your property. The instructions can be very flexible, granting a trustee the power to distribute property when the trustee feels it is appropriate, or the trust document can set out very specific instructions that must be followed.
If your estate is subject to federal death taxes, you will probably want to consider using a trust. A trust typically reduces death taxes owed by your estate. Trusts are extremely flexible legal documents. There are a few more steps involved to create the trust, but there is little or no cost to your family of loved ones after you are gone.
Owning your property in joint name with another person is also a simple estate plan. The primary advantage to owning property in joint name is that title passes automatically to the surviving joint tenant when you die. This means your joint tenant does not have to hire a lawyer to probate your property after your death.
It is important to review where you are granting joint property. For example, many parents put a child's name on property, such as adding a child's name to a bank account. This is often done for convenience, to allow that child to assist with bill paying and banking. The parent has a will stating to divide all property equally among all children. The parent might assume that the will controls and overrides joint property rules, but that is not the case in joint property. In this case, the bank account would belong to the child whose name was on the account.
When assets are held as joint property, the property automatically passes to the joint tenant. A major disadvantage to owning property in joint name can be increased income taxes and possibly death taxes that could have been avoided.
Many people think that all their property will be divided in equal shares among their children if they have a will or a trust that says that they leave all property in equal shares to their children. Unfortunately, this is not always the case. A will or trust has no effect on how certain types of property are distributed. There are four types of property that pass according to the terms of the contract and are not affected by your will.
- Life insurance
- Annuities
- IRAs and retirement accounts
- Certain business contracts
Life insurance and annuities are paid to the person you names as a beneficiary when you purchased them. Both of these types of property are paid according to the terms of the contract. Sometimes people have the same misunderstanding about life insurance and annuities as they do about joint property. People tend to think that a will or trust controls all of their property. You will find as you proceed through the process of planning that you need to evaluate how each piece of property, including life insurance and annuities, will be paid when you are gone.
IRAs (Individual Retirement Account) and retirement accounts (e.g. 401k) are also paid to the person you named as a beneficiary. Your will or trust will have no effect on who receives those benefits. Also, more complex business contracts for partnerships and corporations often have buy-out provisions that will control and cause the partnership or corporate sotck to be excluded from the probate process.
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