Distributing Your Assets Your Way: Using Wills and Revocable Trusts in Your Estate Plan

A perfect familyDeciding how to pass your assets to your heirs upon your death is an important part of your overall financial plan. A number of approaches are available to you, including designating co-owners of your assets while you are living or including a “pay on death” or “transfer on death” designation where your state’s law allows. In addition, how you structure your beneficiary designations for retirement accounts or life insurance will direct how these assets are distributed. Finally, you may use wills or trusts, all of which can offer varying degrees of tax advantages and other opportunities, to preserve your wealth.

While local newspaper advertisements and do-it-yourself estate planning kits tout the virtues of using a “revocable trust” to direct distribution of your assets or avoid probate at your death, it’s important to understand how to best integrate this form of trust so it works together with your will for the benefit of your estate. Failure to do so may mean making decisions that might not be best for your situation or which don’t reflect your wishes.

It’s become popular to use tools like revocable trusts to avoid the probate process as well as for other estate planning reasons. These questions may help you better understand the tools available to you and decide on the best options for your situation.

Why do you need a will?

If you have prepared a formal estate plan, a will serves as its centerpiece. Unfortunately, many people still die intestate, meaning without a will. In such cases, the laws of your state determine how your assets are distributed − typically among certain family members − following your death.

Having a will allows you to:

What is the probate process?

Probate is simply the court-supervised process of accounting for your assets, settling your debts and expenses, and making final distribution of your remaining assets to your estate beneficiaries after your death. During probate, the court looks to your will for direction on how to distribute your assets.

However, your will and the probate process only affect the distribution of your individually owned assets – those assets subject to probate. Assets you own with someone else may transfer according to state law. In states where multiple property owners are considered “joint tenants with right of survivorship” – a legal term that means you each share full ownership of the property – will automatically become the property of your surviving owner after your death. For example, if you and your spouse purchased property together, and one of you dies, the other then becomes full owner of the property. The deceased owner does not direct how his or her share of the property is disbursed, and your will doesn’t change that.

However, in some states, joint ownership may be interpreted as “tenants-in-common,” where the deceased owner’s share of the property is distributed according to the terms of his or her will. Because of these differences, it’s important to consult your estate planning attorney to determine the laws that govern your estate. Assets such as life insurance policies, retirement plans, and individual retirement accounts (IRAs), are transferred through beneficiary designation, meaning they go to the individual or organization you indicated when you bought the policy or began contributing to the plan or account.

Revocable trust:
A trust is a financial arrangement by which a third party, or “trustee,” holds assets on behalf of a beneficiary. A revocable trust is a trust in which the person who established the trust may change the terms of the trust or revoke the trust entirely at any time. Assets held by a revocable trust are still considered personal assets for estate tax purposes.

Irrevocable trust:
Typically, an irrevocable trust cannot be changed after it is established. Assets placed in an irrevocable trust are not considered part of an individual’s estate and are not included in the valuation for estate tax purposes. Revocable become irrevocable upon the death of the person who established the trust.

Will:
A will is a legal document that states your wishes for the distribution of your assets, the appointment of a personal representative or “executor,” and the establishment of a guardian for any minor children. The terms of your will only address those assets that pass through your estate. Assets that are distributed outside of your estate, such as jointly titled property or those passing through beneficiary designation, are not directed by your will.

What does a revocable trust do?

The probate process varies widely in different parts of the country. When appropriate, a tool often used to avoid probate is the revocable trust. Assets transferred to the trust during your lifetime avoid the probate process. Similarly, the assets and the terms of the trust are not typically a public issue. A revocable trust can also include all of the terms for the distribution of your assets that you would otherwise include in your will.

Revocable trust vs. irrevocable trust – what’s the difference?

Your ability to control the use of the trust assets or change the trust terms differentiates a revocable trust from an “irrevocable trust.” Typically, a revocable trust will provide that during your lifetime, you receive all of the benefits of the trust assets as you choose. Following your death, the trust assets are distributed in the manner you’ve directed through the trust terms.

An irrevocable trust can be created during your lifetime or can be established through estate planning documents at your death. For example, you may structure a revocable trust so that it becomes an irrevocable trust after your death. Irrevocable trusts include terms for how assets should be held or distributed for your beneficiaries throughout the term of the trust. In addition, irrevocable trusts may offer estate tax or other advantages.


What is the probate process?

Probate is simply the court-supervised process of accounting for your assets, settling your debts and expenses, and making final distribution of your remaining assets to your estate beneficiaries after your death. During probate, the court looks to your will for directionon how to distribute your assets.

However, your will and the probate process only affect the distribution of your individually owned assets – those assets subject to probate. Assets you own with someone else may transfer according to state law. In states where multiple propertyowners are considered “joint tenants with right of survivorship” – a legal term that means you each share full ownership of the property – will automatically become the property of your surviving owner after your death. For example, if you and your spouse purchased property together, and one of you dies, the other then becomes full owner of the property. The deceased owner does not direct how his or her share of the property is disbursed, and your will doesn’t change that.

Should you use both a will and trust?

In addition to streamlining the asset transfer process and protecting your privacy, a revocable trust can also be a useful tool for specific circumstances, such as when you’re transferring out-of-state assets. Holding the out-of-state asset in a revocable trust during your lifetime avoids the need for a second probate proceeding in that state following your death. A revocable trust is also useful in the event that someone needs to manage your assets if you’re incapacitated, as you may appoint a trustee to do so.

However, even when a revocable trust is the centerpiece of your estate plan, it is still not a complete substitute for a will. A will is necessary for the disposition of any assets you did not transfer to the trust during your lifetime, as well as for designating an executor or personal representative and a guardian for any minor children.


Is a revocable trust right for you?

As with any estate planning tool, you need to determine if trust planning will help address your individual situation. Factors to consider include:

Pulling it all together

Understanding how both wills and revocable trusts work to protect your assets and directives is an important part of making the right decisions for your estate plan. Work with your wealth manager and estate planning attorney to implement the right tools for your situation.

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