Tag: Advisor Enablement

Financial Power of Attorney Explained

So much of estate planning is thinking through how you want things handled after you die, before you start actually making a documented plan. The idea of a financial power of attorney (FPoA) flips that a bit, because it’s about appointing someone to handle your affairs in case you become incapacitated and can’t make your own decisions. The process seems complex, but we’ll simplify it so you can make sense of the basics you need to know to include this important element in your estate plan.

In a nutshell, a financial power of attorney is a document in which you appoint a trusted person to act on your behalf to make financial decisions. In establishing a FPoA, you hand over the legal reins to another person to conduct financial transactions, sign documents, or make other legal decisions as if they were you. This might happen for only a limited period of time (during a serious illness or after an accident, for example), or it can take effect immediately upon signing and last up to your end of life. Once your FPoA is completed, your trusted person, the agent, sometimes called an attorney-in-fact or fiduciary, can be responsible for managing your financial affairs. You will need to use a second document, called an Advance Health Care Directive (sometimes known as health care proxy or health care power of attorney), to designate who should handle all of your medical decisions. There are several types of FPoA, so consider the specific needs of your estate before selecting one.

Durable Power of Attorney

The type of FPoA most commonly used in estate planning is a durable power of attorney. “Durable” indicates that your agent has your permission to act on your behalf even though you are incapacitated or disabled. In other words, the FPoA is effective until you either revoke the document or have passed away.

You can spell out your agent’s powers, responsibilities and restrictions in the FPoA. The powers vary from state to state but usually include the ability to:

• Sell or manage property and real estate
• Sign legal documents and checks
• Manage personal and business-related financial accounts
• Pay medical bills (but not make healthcare decisions)
• File taxes and settle claims on your behalf

Hire professional assistance, such as a lawyer or advisor

Non-Durable Financial Power of Attorney

When an FPoA is not “durable,” your agent’s powers end when you become incapacitated or disabled. In other words, you want to supervise your agent’s use of the FPoA powers. This can be a good option for transactions that are not driven by estate planning needs. For example, you might grant your advisor a non-durable FPoA to conduct time-sensitive trades on your behalf.

In addition, you may be comfortable allowing your agent to change your estate plan or the rights of your beneficiaries; because these are such sensitive powers, in most states, you must affirmatively grant each estate planning power.

Why Include a Durable Power of Attorney in Your Estate Plan?

A complete estate plan should provide not only for death, but incapacity and unavailability. Putting a FPoA in place allows someone to continue managing your financial affairs if you cannot sign important documents yourself in case of emergency, a routine surgery, or even travel abroad.

Keep in mind that to complete your FPoA, it must be signed in accordance with your specific state’s requirements, which might mean signing before a notary public or witness(es).

The wealth.com platform makes it straightforward to get your Financial Power of Attorney drafted and securely stored in our Vault, and provides state-specific guidance on how to fill out and sign your FPoA.

Get this guide to Financial Power of Attorney as a printable PDF

TL/DR

A Trust is a financial agreement between someone who owns an asset and a trusted person to hold and manage that asset for them. In estate planning, a Revocable Trust is often used as a substitute for a Will, but there are many types of Trusts that accomplish different objectives. If you’re trying to decide whether you should have a Trust in your estate plan, read this two-part article.

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What’s the difference between a Marital Trust and a QTIP Trust? Are Bypass Trusts and Credit Shelter Trusts trying to accomplish the same goals? As you start learning about Trusts, you’ll learn that there are subtle differences between the Trusts that you might include in your foundational estate plan. Adding to the confusion, each lawyer has a different name for Trusts that do pretty much the same thing, and we try to provide the most common names for them.

Choosing to use a Trust in your estate plan is about being clear on your goals for how your assets should go to your loved ones. Trusts are created through a contract, and so there are a million different ways to write a contract to meet your specific goals.

This Article is divided into two parts. Part 1 is a primer on the key differentiators between Trusts. This Part 2 is a summary of the most commonly created Trusts in a foundational estate plan and their benefits.

The trusts named in this article are the ones you are most likely going to encounter when creating your foundational estate plan, which is centered on a Will or Revocable Trust and disposes of your assets when you pass away. This article does not discuss Trusts that you might create during life for wealth transfers or tax planning.

It is also important to realize that the descriptions for these Trusts are not mutually exclusive; you can use multiple adjectives to describe one Trust in your estate plan. For example, you can create a Marital Trust that is also a Spendthrift Trust.

Revocable or Living Trust

This Trust is most often used as an alternative to a Will for disposing of someone’s assets at death. It is also a great vehicle to transition the management of your financial affairs smoothly to someone whom you trust, in case you become incapacitated.

Learn more about Revocable and Irrevocable Trusts in Part 1 of this article.

Marital Trust

The Trust’s creator (“trustor”) creates this irrevocable Trust for the primary benefit of the spouse (i.e., your spouse can enjoy your assets after you have passed away). A Marital Trust is useful for someone who has a blended family, worries about elder abuse of their spouse or someone influencing their spouse to disinherit their beneficiaries, or is wealthy enough to worry about the estate and generation-skipping transfer taxes. There are many ways to design a Marital Trust, but if you also want your spouse’s inheritance to qualify for a benefit called the “unlimited marital deduction” (i.e., you could pass an unlimited amount of property to your spouse completely free of estate tax at your death), the Tax Code has stringent requirements for the design of this Trust (see “QTIP Trust” below).

QTIP Trust

The Qualified Terminable Interest Property Trust is a specific kind of Marital Trust. Its terms are properly structured to comply with the tax rules so that you can pass your property to your spouse in a trust and still benefit from the unlimited marital deduction.

One of the biggest “loopholes” under the estate tax rules is the unlimited marital deduction. This deduction allows you to pass unlimited amounts of property to your spouse (beyond the estate tax exemption of $12.92M in 2023), completely free of the estate tax.*

Not all Marital Trusts comply with these rules. For example, your Marital Trust may say that your spouse will be the only beneficiary for the rest of your spouse’s life, but if your spouse remarries, the Trust will end and your assets will pass to your other loved ones. By inserting the condition about remarriage, your Marital Trust does not comply with the tax rules. Your gift to your spouse counts toward the federal tax exemption, along with any property you pass to other non-charitable beneficiaries, and could lead to an inadvertent foot fault where your estate owes estate taxes.

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*As with all things tax, there are a lot of factors to unpack in this statement. Importantly, your spouse must be a U.S. citizen. In addition, the federal government only grants this benefit to individuals who are legally married, and not individuals in a domestic partnership, civil union, or other relationship arrangements. The fact that the unlimited marital deduction was not available for individuals in same-sex marriages performed under state law was the basis for the seminal case, U.S. v. Windsor, 570 U.S. 744 (2013). The case declared the federal law, the Defense of Marriage Act, to be unconstitutional and forced the federal government to grant the same government benefits to same-sex spouses. Those government benefits include the estate tax deduction!

Family, Bypass, or Credit Shelter Trust

This Trust goes by many names, but in essence, it is an irrevocable Trust created at your death to allow your family to engage in death tax planning.* If your estate may have a tax issue, this Trust allows your executor or trustee to use what remains of your tax exemption amount ($12.92M in 2023 at the federal level*2) and shelter those assets from future death taxes. This Trust becomes a “family bank,” where assets continue to grow and benefit a family, but no death tax will be imposed with the passing of each generation.

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*“Death taxes” in this article refers to the estate tax and generation-skipping transfer tax. These two tax regimes exist at the federal and state levels.

*2 The exemption amount may be significantly lower at the state level, and can be as low as $1M.

A/B Trusts

This term applies to estate planning for couples. It describes the most common combination of Trusts that are formed at the death of the first person who passes away: the Marital Trust (“A Trust”) and the Family Trust (“B Trust”). Your estate plan will then specify a mechanism for how your executor, trustee, or even your spouse, can allocate assets between those two Trusts.

As an additional variation on this term, if you and your spouse have a joint Trust (i.e., you created your estate plan together through one Revocable Trust), your estate plan may use A/B/C Trusts. In addition to the Marital and Family Trusts, your estate plan might create a Survivor’s Trust (read more below).

Survivor’s Trust

The Survivor’s Trust is relevant only when a couple creates a joint revocable Trust; it is the continuation of the revocable Trust once one person has passed away. With a joint Trust, the estate plan must describe where all of the couple’s assets will go – not only the deceased person’s assets, but also the survivor’s assets. Because one half of the couple is still living, the Survivor’s Trust exists to collect and hold the survivor’s assets without requiring the survivor to create a brand-new estate plan. The survivor can thus change and revoke the Survivor’s Trust as desired (but a Marital Trust or Family Trust is irrevocable).

Trust for Descendant or Trust for Issue

This type of Trust goes by many names, and often references the name of the primary beneficiary (e.g., Trust for Sara). This irrevocable Trust allows the beneficiary to enjoy the Trust assets, but without the full control that comes with owning assets in their own name. This Trust is useful for designating someone else to manage financial affairs while the beneficiary is not ready or able to handle the responsibility, ensuring that assets stay within a family, protecting an inheritance from divorce or creditors (e.g., the beneficiary’s personal debts), and planning for death taxes.

These Trusts are drafted in many different ways, and can take the form of a Holdback Trust or Special Needs Trust, as appropriate.

Holdback Trust

The primary purpose of this Trust is to “hold back” the inheritance for a younger beneficiary until the beneficiary comes of age. This irrevocable trust is meant to be a temporary vehicle and is more robust than a UTMA account in allowing the trusted person to manage the beneficiary’s finances. Usually, you will be given the opportunity to decide on which birthday the trust will end and the beneficiary should be able to receive all the assets.

Special Needs Trust

This irrevocable Trust is structured with a beneficiary who has long-term special needs in mind. The Trust usually lasts during the life of the beneficiary and preserves the beneficiary’s eligibility for government programs like Medicare. This Trust should have provisions allowing a trusted person to modify the Trust terms to optimize the Trust for the needs of that beneficiary, such as restricting certain powers, or adapting to government rules to access benefits.

Charitable Trust

This irrevocable Trust benefits a charity, and usually is created so that the gifts to the Trust qualify for a charitable deduction for income tax purposes, estate tax purposes, or both.

The second of the biggest “loopholes” in the estate tax rules is that a properly made gift to charities qualifies for an unlimited deduction (see “QTIP Trust” for the other unlimited deduction). To set up a Charitable Trust for tax planning, you must make sure that there are restrictions so that the organization cannot receive a Trust distribution unless it qualifies under the Code (usually, an organization that has maintained its 501(c)(3) status, but the estate tax rules have slight variations).

Pet Trust

This irrevocable Trust benefits pets. You would name someone to take care of the pets and to handle the finances for your pets (which may be the same person or different people). However, Pet Trusts are disfavored under the law. For example, you may be able to benefit only the pets who are alive when you pass away, and not their descendants, and the Trust’s distributions are taxed as income to the caretaker even if they are used to cover the pets’ expenses.

Spendthrift Trust or Asset Protection Trust

This Trust must be properly structured according to state law to grant the layer of protection from legal claims against the beneficiary and the creditor’s state must also respect that result. When the asset protection is respected, the Trust’s assets are considered separate from the personal assets of the beneficiary to satisfy personal claims against the beneficiary. For example, the Trust’s assets may not be considered in alimony calculations upon divorce, or the Trust’s assets cannot be forced out of the Trust to pay the debt or a monetary judgment against the beneficiary. Oftentimes, creating this Trust requires an affirmative statement in the Trust document and giving the trustee full discretion to decide when distributions can be made.

TL/DR

A Trust is a financial agreement between someone who owns an asset and a trusted person to hold and manage that asset for them. In estate planning, a Revocable Trust is often used as a substitute for a Will, but there are many other descriptions for any single Trust such as Irrevocable, Living, Joint, Testamentary, and Grantor. If you’re trying to unpack these terms and decide whether you should have a Trust in your estate plan, read this two-part article.

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A Joint Trust, a Testamentary Trust, a Sub-Trust, a Revocable Trust (which sounds so much like “Irrevocable Trust” when said out loud)… There are so many adjectives used to describe Trusts, and it can quickly make your head spin. Once you dig deeper into these descriptive words for Trusts, you realize that many of these concepts come in pairs. Once you understand what feature of a trust is being described, and what the point of comparison is, it becomes much easier to understand the Trust’s use case.

This Article is divided into two parts. This Part 1 is a primer on the key differentiators between Trusts. Part 2 is a summary of the most commonly created Trusts in a foundational estate plan and their benefits.

Choosing to use a Trust in your estate plan is about being clear on your goals for how your assets should go to your loved ones. Trusts are created through a contract, and so there are a million different ways to write a contract to meet your specific goals.

Here are the ways to describe a Trust that we will explore in this article:

Every term describes a different aspect of a Trust, and they are not mutually exclusive. In fact, every Trust can be described using one of the two choices from each category above. For example, if you use a Trust as a substitute for a Will in your foundational estate plan, you likely created a Revocable, Individual, Inter Vivos, Grantor Trust (most commonly shortened to “Revocable Trust”). If a Marital Trust will be created at your death, you will be creating an Irrevocable, Individual, Testamentary, Non-Grantor Trust. Let’s unpack each of these terms.

Revocable vs Irrevocable Trusts

The Revocable Trust, as the name implies, can be undone or unwound; the person who creates the Revocable Trust can simply “revoke” or “pull back” the Trust. The Irrevocable Trust, on the other hand, is much harder to change.

The Revocable Trust is often used as an alternative for a Will. It can also be used as an alternative to LLCs or Corporations to own an asset more privately while the owner is still alive.

The Irrevocable Trust is often used to give away assets while maintaining control over how the assets are used or to protect from specific types of taxes.

For most people, the introduction to Trusts begins with their own estate planning when they have to choose between making a Will or a Trust. In this context, the type of Trust you will be considering is the Revocable Trust (also commonly called a “Living Trust”).*2

Just as you would be able to change or completely revoke a Will (in many states, you could do this by ripping the original document!), you should be able to change or completely revoke your Revocable Trust. This is important because you could change your mind over the course of your life about key terms, such as who should get what asset. While you are alive and have mental capacity, you can easily change or revoke your Revocable Trust by signing a new Trust document.

An Irrevocable Trust is much harder to change, and it becomes especially difficult to remove or add beneficiaries or modify their individual rights. You might encounter this type of Trust even when creating your foundational estate plan (for example, a Marital Trust). In most states, once the Irrevocable Trust exists, changing this Trust requires the appointment of an independent trustee (if the Trust allows for it), the agreement of all the beneficiaries, or a court action. All of these options may be expensive and may require hiring an estate planner to do it right. For this reason, you must be certain you understand what powers and benefits you are giving up when you transfer property into an Irrevocable Trust.

That being said, Irrevocable Trusts are powerful vehicles for wealth transfer and preservation because you can control how the assets will be used. When properly structured, they provide protection against death taxes and creditors, which Revocable Trusts cannot do.

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*This article is about different adjectives describing Trusts. To learn more about why you would want a Revocable Trust instead of a Will, check out the article.

*2 “Living” is also sometimes used interchangeably with “Inter Vivos” (see section on “Inter Vivos v. Testamentary Trusts”). But its most common use is to mean a Revocable Trust that is used as a substitute for a Will.

Individual vs Joint Trusts

An Individual Trust has one creator (called a “trustor,” “grantor,” or “settlor”), whereas a Joint Trust has two or more trustors. If you would like to create a Trust with someone else, be clear on why.

The most common reason to set up a joint trust is with your spouse. You already share in the management of the assets (e.g., you live in a community property state), file income taxes together, and share similar values, goals, and beneficiaries.

Income tax filings and payments may become messy if you and the other person are expected to report and pay the income taxes on the assets of the Trust (see “Grantor vs Non-Grantor Trust”) below.

For gift tax reasons (as well as introducing potential for complicated legal claims), you should also consider carefully giving your assets into a Trust that was created by someone else. For example, it may be tempting to give an inheritance to your nephew in a Trust that your parents set up for your nephew. It may be better for you to set up your own Trust to keep the Trust management straight-forward.

Inter Vivos vs Testamentary Trusts

Inter Vivos Trusts* are created during the trustor’s lifetime, whereas Testamentary Trusts are created only at the trustor’s death. This description is about the timing of when a Trust exists and can hold assets.

Inter Vivos Trusts allow the creator of the trust to transfer assets during life. Testamentary Trusts lie in wait until the creator has passed away and receive assets only then. The most common way to create a Testamentary Trust is to draft it into a Will or within another Trust (i.e., a “Sub-Trust”).

You may encounter both Inter Vivos and Testamentary Trusts when creating your foundational estate plan. For example, if you use a Revocable Trust as a substitute for a Will, you are creating an Inter Vivos Trust. In fact, it is important to transfer as much of your assets into this Trust during your life, if minimizing probate is important to you.

Your estate plan may also involve any number of Testamentary Trusts (created under your Will or your Revocable Trust) in order to specify how your assets can be used or given away after your death or to allow your loved ones to minimize future taxes. For example, you might set up a relatively short-lived Testamentary Trust called a “Holdback Trust” just so someone can help your child manage their financial affairs until your child is older.

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*This term means “among the living” in Latin, and the English translation is “Living Trust.” However, the Living Trust is now commonly associated with Revocable Trusts used as a substitute for a Will, and so “Living” has become a confusing term because you can create an Irrevocable Trust during your life.

Grantor vs Non-Grantor Trusts

If you’ve made it this far in this article, you are really well on your way to understanding the features of a Trust that are important to an estate planner. Here is one more concept, which may matter more to your CPA. Your Trust may own assets that produce income (for example, real estate that is leased). It’s important to understand who is responsible for paying income taxes for Trust assets: you or the Trust.

A Grantor Trust does not pay its own taxes; another person (usually the Trust creator) must include the Trust’s income on his, her or its tax return and pay any income taxes. A Non-Grantor Trust pays its own taxes using the tax brackets for estates and trusts, which are different from the tax brackets for individuals.

Grantor Trusts retain enough of a connection to its “owner” (or “Grantor”) under the Tax Code so that the Grantor pays the taxes. Who is an owner is determined under a complex set of tax rules, and estate planners often intentionally turn on or turn off Grantor status on the Trust; but at a minimum, the owner must still be alive.

Having a Grantor trust is beneficial if you do not want to complicate tax reporting by having the Trust file a separate tax return or you want to treat the payment of taxes as an additional annual gift to your loved ones. In addition, a Non-Grantor Trust generally pays more income taxes than an individual taxpayer on the same amount of income. This is because the trust tax brackets are “compressed”; a Trust taxpayer reaches the maximum tax rate (i.e., 37%) at a lower income than does an individual taxpayer.

How does this concept apply to your foundational estate plan? If you use a Revocable Trust as a substitute for a Will, it will be a Grantor Trust that you “own” during your lifetime. A Revocable Trust does not result in any income tax savings: you must include the Trust’s income on your own tax return and pay those income taxes.

If you use a Sub-Trust (or Testamentary Trust) in your Will or Trust, that Trust will be created at your death and will usually be a Non-Grantor Trust. It will have to file and pay its own income taxes.

If you’re ready to get started creating a Revocable Trust follow this link.

To learn more about specific types of Trusts and their objectives, read Part 2 of this series.

What’s the Difference and Which One Is Right for Me?

TL/DR: In simple terms, a Will is a legal instruction to the court about what should happen to what you own after you have passed away. A Trust is a contract you make with someone whom you trust about what you own, regardless of whether you have passed away. There are many types of Trusts, but the Revocable Trust (or Living Trust) is most commonly used as a substitute for a Will. The Revocable Trust may offer you some advantages that a Will doesn’t, as this article will explain.

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In climactic movie scenes and music videos when a family gathers to hear how the dead person’s fortune will be split up, it’s always the deceased’s Will being read out loud for the big reveal. In real life, however, a Will doesn’t get read out loud; instead, the executor sends a copy to all known beneficiaries.

Even without a dramatic reading, you might still have concerns about keeping your last wishes private. A Will becomes a publicly available document on the probate court’s docket. Probate is often how the press learns the details of a celebrity’s assets and who the heirs are after the celebrity has died.

If maintaining your privacy is important to you, consider making a Trust – and not a Will – the centerpiece of your estate plan.

A Revocable Trust (or Living Trust)* can be a great alternative for many reasons, beyond privacy. These fall into four main categories:

1. Avoiding the court process at death
2. Keeping your wishes private
3. Planning for your incapacity
4. Learning a new set of words

Note that just because most Americans have a Will* and not a Trust does not mean that you should have a Will. Depending on your situation and wishes, a Revocable Trust may be the best option for you.

If, after we dig deeper into each of the differences, you’re still not sure, take our quiz here.

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*1 The rest of this article may refer to this type of Trust as simply “Trust.” A Revocable Trust (or Living Trust) is not to be confused with an Irrevocable Trust. Learn more about this topic here.

*2 A lot more people have a will (60% of the people we surveyed in our estate-planning research who have an estate plan) vs. a trust (38% have a living or revocable trust, and just 19% have an irrevocable trust).

Avoiding the Court Process at Death

The main reason people choose a Trust is to simplify the court process that happens at death, which is called “probate.” If you die with a Will that distributes your assets (or without an estate plan at all), a probate judge will oversee how your assets will be distributed.

This process can be difficult and expensive and take a long time. If one or more factors indicate that probate will be more onerous for your estate, you should consider putting in place a Trust to avoid probate. These factors are:

(a) You live in a state that tends to have a complicated or expensive probate process.

(b) You own real estate (or tangible objects of significant value) that is located in a state other than your home state.

(c) You own assets that are complex and may require more active court supervision, like stock that is not publicly traded.

Unpacking each of these factors:

(A) Some states charge probate or court fees based on the size of your estate (i.e., how much you owned in your name at death). Attorneys may charge up to tens of thousands of dollars to help your executor navigate probate. All those fees are first paid from your assets, so there will be less left to distribute among your loved ones. And even when your assets are not particularly complex, probate in your home state could tie up your assets for up to two years. If you live in a state like this, a revocable trust will allow you to put more control in the hands of your trustee and “bypass” much of the probate process.

(B) If you own real estate or personal property in another state, dying with only a Will means that your executor must start probate processes not only in your home state, but in all the other states as well. By putting the property located in other states in your revocable trust,* your trustee will be able to avoid these “offshoot” probate proceedings.

(C) If you own assets that are a little more complex, such as stock that is not publicly traded, your executor will have to coordinate more closely with the probate court to make sure the stock is properly transferred to the appropriate beneficiaries. This can lengthen the time for probate.

If you anticipate that probate would be costly and time-consuming for your loved ones, a Revocable Trust might be the best option for you.

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*If you place the real estate or personal property in an entity like a limited liability company (LLC), you may also be able to avoid probate, but that analysis must be done by an attorney licensed to practice law in the state where your real estate or personal property is located.

Keeping Your Wishes Private

As part of the probate process, a Will becomes part of the public record. Revocable Trusts typically avoid probate (unless there is an issue like an angry family member who brings a legal claim against your Trust). With a Revocable Trust, your estate plan is more likely to remain private.

Information that will become public if part of your Will include:

(a) Who you consider to be your family members.

(b) Who you want to exclude from receiving your assets or having a trusted role in your estate plan.

(c) Who will receive your assets, and how much of your assets they will receive.

(d) How you would like your last remains to be handled.

If you would prefer to keep these details private, a Revocable Trust might be the best option for you.

When They Become Effective

A Will does not become effective until you die, whereas a Trust is effective immediately on the day you create it. As a result, a trust has legal effect before your death – i.e., while you are alive but either incapacitated or unavailable. If it is important for you that someone take over responsibility for your financial affairs immediately if something were to happen to you, then a Revocable Trust gives you a more powerful vehicle compared to a Will or a financial power of attorney.

Ensuring that “it’s business as usual,” can be especially important if you own a closely-held business and you are expected to be involved in the day-to-day operations or in making high-level decisions by voting your shares. Your succession planning for your business should include transferring your shares into a Trust so that your trustee can step into your shoes if something happens to you.

Learning a New Set of Words

A Trust can be used as an alternative to a Will, but the vocabulary will be different and less familiar to most people, which contributes to the feeling that Trusts are more complicated than Wills. For example, instead of referring to an “executor” or “personal representative,” the trusted individual who will manage your affairs is called a “trustee.”

That being said, if there are factors indicating that you should have a Revocable Trust, you should not let legal terms discourage you from using a Trust as the centerpiece of your estate plan.

What Are Common Misconceptions about What a Trust Can Do For Me That a Will Can’t?

1. If you have a Revocable Trust, you won’t need a Will.

Even if you have a Revocable Trust, you will still need a Will. If you pass away with any assets in your own name, you need a Will to make sure all of those assets go into your Trust, where the Trust will instruct where those assets will go. This type of Will, which accompanies a Revocable Trust, is much shorter than a standalone Will and is commonly known as a “pour-over Will.” This is important because some assets must be owned in your own name while you’re alive, like a retirement account, and you may not get around to putting all your assets in the name of your Trust before you pass away.

You will also need a pour-over Will to name an executor and guardian(s) for your children, if any.

2. As long as I have a Revocable Trust, my loved ones will definitely avoid probate.

A Will must go through probate, whereas a Revocable Trust has the opportunity to avoid probate.

First, you will need to “fund” your Trust, which means transferring as much of your assets as possible into your Revocable Trust. Some courts, like in California, may allow you to avoid a full-blown probate if you show that you intended to fund your trust by signing a general assignment of all your assets into the trust. Other states will instead require that you actually re-title any real estate and change the owner on your bank accounts and other assets.

Lastly, the probate court may become involved to resolve any issues among your beneficiaries or trustees. For example, someone may call into question whether your Will and Trust are not valid.

3. A Revocable Trust will make it harder for someone to sue my estate.

We all fear that someone will be unhappy with the wishes of the decedent or how the estate administration is being handled and bring a lawsuit against the estate. Having a Revocable Trust instead of a Will will not deter a motivated person from suing against your assets at your death.*

Note that a Revocable Trust should not be confused with an Irrevocable Trust, which may offer some level of asset protection. Asset protection means that a creditor (for example, someone to whom the Trust beneficiary owes money for an accident) may not be able to reach the Trust assets because the assets are considered to be separate from the beneficiary and cannot be used to fulfill the beneficiary’s debt.

4. If I anticipate that my estate will owe death taxes, I must have a Revocable Trust.

Tax planning for estate and generation-skipping transfer taxes can be accomplished with either a Will or a Revocable Trust as the centerpiece of your estate plan. You do not need a Revocable Trust just because you may have a death tax issue. The important thing is to make sure your Will or Trust has the proper provisions to meet your tax planning goals. Your Will or Trust must create Trusts after you’ve passed away (a testamentary sub-Trust) that comply with the Tax Code and direct your assets into those sub-Trusts using rules or formulas that will minimize taxes in the long term.

Sub-Trusts are Irrevocable Trusts created at your death and are not to be confused with Revocable Trusts that you create while you are alive as an alternative to writing a Will.

5. If I would like more control over how my assets are used after my death or keeping my assets within my family across generations, I must have a Revocable Trust.

If you would like to maintain some control over how your assets are used or gifted away after your death, you should make sure sub-Trusts (see 4 above) are created after your death. To create this type of sub-Trust, you can use either a Will or a Revocable Trust as the centerpiece of your estate plan.

Sub-Trusts are Irrevocable Trusts created at your death and are not to be confused with Revocable Trusts that you create while you are alive as an alternative to writing a Will.

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*Certain estate planning tools exist to deter someone from suing your assets, including “no contest” or “in terrorem” clauses. These tools can be implemented in a Will or a Trust with the advice of an attorney.

The chart below summarizes the overlap and differences between a Will and a Revocable Trust in most U.S. states.

Six reasons people think they don’t need one when they really do

TL/DR:

In short, everyone can benefit from having an estate plan. There is no specific income threshold or criteria to meet in order to need an estate plan or gain the benefits from having one in place. Your circumstances and personal wishes are what guides how estate plans are created, but the specifics of your life shouldn’t prevent you from realizing the benefits of having an estate plan.

This article explains under what specific circumstances you might need an estate plan and why the reasons you think you might not need one aren’t always true.

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For many people, the word “estate” in estate planning conjures up images of a mansion with servants and grand staircases and probably a stable out back. Most people don’t see themselves in those images, which means they relegate estate planning to the über-wealthy. The result? You likely have formed a few misconceptions about who needs an estate plan, confident in your belief that it’s simply not for you. But that’s a costly mistake many people make. Here, we bust six of the most common myths about who needs an estate plan.

Myth 1: Not me, I’m not rich enough.

Do you have a savings account? A car? A dog? These are not the trappings of the rich and famous, but they are parts of your estate that will need to be taken care of or find a new home when you die.

Reality: Yes, you have an estate, which is really just a fancy word for all your stuff. There is no minimum net worth that triggers a need to create an estate plan, but rather a series of decisions you can choose to make. Otherwise, you will let laws drafted long ago determine where your stuff should go and a judge who has never met you might decide who should manage your affairs and take care of your kids. You may already have designated a beneficiary for some of your accounts—your 401(k) and life insurance, for example. But that’s just a first step toward a plan; estate planning is the best way to direct how the rest of your property and possessions should be divvied up.

Myth 2: Not me, I’m not old enough.

We get it—lots of people put off estate planning because it makes them confront the idea of death. But guess what? It’s going to happen to all of us, and none of us know when, so it’s better to be prepared, right?

Reality: You can start estate planning as soon as you turn 18 (and in some states, even younger!), but the real trigger is when you start acquiring things—money, real estate, vehicles, collections—that you want to protect after you die. And, of course, having kids is one of the biggest reasons people start thinking about estate planning.

Even in their 20s, most people have possessions they’d like to see passed on to family members or other loved ones. You may be worried that no one in your family would know to give your pets to your neighbor or friend, rather than surrender them to a shelter. Or, if something were to happen to you, you feel strongly that you would want certain family members (but not others) to manage your affairs or make medical care decisions for you.

Myth 3: Not me, I don’t have any valuable property to pass down.

Just because you don’t own real estate doesn’t mean you don’t need an estate plan.

Reality: Often value is in the eye of the beholder. Maybe you and your favorite nephew have always shared a passion for model trains and you would want him to end up with your train set that he always admired. Or you would like to make a last cash gift to your favorite charity as part of your legacy. You can include instructions in your will about sentimental possessions too, ensuring they are preserved and appreciated by future generations.

Myth 4: Not me, my family knows exactly what I want to happen when I die.

Do they really? Are you sure? Do they know your feelings about organ donation, and would they respect them? If your family situation is calm and uncomplicated, that may be true. But that’s not most of us.

Reality: Making an estate plan is a gift to your loved ones that protects and provides for them while clearing up any confusion about your wishes. If something were to happen to you, it will be an upsetting time for those who step in to make the toughest decisions on your behalf. There could be disagreements about your treatment and care, who should sign paperwork on your behalf, and where your stuff will end up. When you take the time to put instructions into documents like an advance health care directive, a financial power of attorney, and a Will and/or Trust, you eliminate second-guessing and free your loved ones in making those tough decisions.

Myth 5: Not me, I don’t have kids, so I don’t need a Will.

Writing a Will that designates guardians for minor children is a commonly cited objective for estate planning, but it’s not the only one by a long shot.

Reality: If you die intestate (without an estate plan), your possessions and property will pass to your children or spouse in some proportion that varies by state law. But if you’re single and don’t have kids, then it actually makes it more complicated to decide what to do with your stuff. Depending on the state, all of your stuff might go to your parents, otherwise your siblings. If you want anyone else – a nephew, friend or charity – to receive anything from your estate, however small, you need an estate plan.

Myth 6: Not me, I’m not dying anytime soon, so I don’t need to worry about estate planning now.

The COVID-19 pandemic taught us a lot of important lessons about living in the moment, including facing our own mortality. It’s a wake-up call that many of those ages 18 to 34 heard loud and clear. In 2021, 63% more people in that age group created a Will than in 2020.

Reality: In addition to being prepared for the unexpected, there’s a very important part of estate planning that many people forget about because it covers what happens when you’re alive. Signing an advance health care directive and financial power of attorney are two estate planning steps that allow someone else to make decisions on your behalf and grant signature authority over your affairs. The advance health care directive, when it includes a living Will, also clarifies your wishes for the type of medical care you want to receive if you are unable to make decisions for yourself or communicate for yourself.

The bottom line:

Everyone can benefit from an estate plan regardless of circumstance. That doesn’t mean everyone’s estate plan will look the same, it just means that the answer to “who needs an estate plan” is… me.

A How-To Guide for talking to the people you love about what happens when you die:

Most of us have been taught that politics, religion, and money are topics to avoid with family and friends. They are charged with emotion, highlight our differences, and lead to some uncomfortable interactions. Another topic people tend to avoid talking about—especially with our families—is what happens when we die. You know it’s important, but you steer clear of it anyway.

We want to help you to be better prepared to approach these awkward, but necessary, conversations about end-of-life preparations. Whatever your family dynamics look like, there are tips and tools you can use to have more empathetic conversations with your children, siblings, parents, and other loved ones.

Talking With Your Kids

Losing a parent is hard on a child, regardless of the child’s age. But how you prepare your children for when you are gone will change over time as they grow older. School-age kids should be comforted knowing they’ll be taken care of by someone who loves them. As they become older teenagers and adults, it’s time to have more candid conversations about your estate plan, especially if you’ve selected one or more of them to be your:

• Agent on a financial power of attorney
• Trusted health care decision-maker
• Your executor
• Your trustee

They don’t have to be privy to every element of your plan, but it can be helpful to keep them in the loop on the location of your estate planning documents and how to access other accounts as needed.

If you’ve selected one of your children over another to be part of managing your estate, you might want to discuss your rationale—one child lives closer, is more organized, or is older—so there are no hard feelings among siblings. If your children will be responsible for your last wishes, outline the details in your estate plan and also discuss what you want to happen to your body (cremation, burial, donating your body to science), as well as specific instructions for your funeral or other type of celebration or ceremony. This also is an opportune time to discuss end-of-life health care decisions. A 2021 study found that although 90% of people think having conversations about their end-of-life healthcare decisions is essential, just over a quarter (27%) have done so. If you have an advance directive or living Will, your wishes should be spelled out, but discussing them out loud ensures there are no surprises.

Talking With Your Parents or Older Relatives

Once you’re an adult, it’s time to discuss with your parents what kind of plan they have in place. If you know they’ve neglected estate planning, you and your siblings or other relatives are going to be the ones trying to clean up the chaos when they die.

At some point, you also may be the person left to care for older aunts, uncles, in-laws, or grandparents. If these individuals have not designated anyone else to manage their affairs, discuss making your role more official, such as naming you as the agent in their powers of attorney, so you’ll be able to take care of financial and healthcare decisions for them.

If you have a good relationship with your siblings, try to get aligned before having a conversation with your parents so everyone is on the same page. And if you can’t seem to make any headway simply talking about the topic, try sharing informational articles, walking them through a digital estate planning site, or scheduling an appointment to meet with an estate planning attorney. You can’t force them to create an estate plan, but you can help to demystify and simplify the process for them.

Having The Talk

You don’t want to ruin a family celebration by talking about death, but if the holidays or birthdays are the only time you get together as a family, set aside a separate chunk of time to have an estate planning discussion. Be prepared for some emotion and be open to questions and differing perspectives. It’s important to be honest but not overwhelming. These are important decisions that need to happen, but they don’t all have to be finalized in one conversation. Focus on the fact that estate planning provides peace of mind for everyone—both the person dying and their loved ones left behind.

Having a loose agenda or checklist of topics can help ensure you cover all the essentials. Be sure to include Wills or Trusts, financial power of attorney, and healthcare power of attorney.