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Should You Have a Will, A Trust, Or Both?

While you’re trying to earn wealth, it’s not easy to talk about what happens to those assets after you’re gone. Before we had a child, we didn’t see the need for any sort of estate planning. When our net worth was negative, there wasn’t much to get excited about. However, now that we are on track financially and have a child to consider, making plans for the future is very important. A big question I’ve researched at length is whether we should have a will, a trust, or both.

Why You Need a Will

You need a will if you have minor children. If something happens to you and your spouse or significant other, decisions about who is going to raise your children need to be very clear. I don’t think our family would fight over our daughter, but each set of grandparents, aunts, and uncles are in different areas of the country. What if both sides decided she needed to be with them? Having a clear guardian, with a backup, is the most responsible thing you can do to protect your children.

If you don’t have children, aren’t married, or are married and leaving everything to your spouse, you might not need a will. However, you need to make sure you have named a beneficiary on all of your accounts. If all the money is in your name, and you don’t have a will or designated beneficiary, your spouse will not have easy access to funds after your death.  If your estate is more complicated or if you want to leave money to charity or someone other than your spouse, I recommend having a will.

Why You Need a Trust

Many people think a trust is for very rich people and don’t understand why someone with minimal assets might need one. I’ve also heard the misconception that trusts can eliminate estate taxes. What exactly is a trust and what does it do?

While there are several types of trusts, the one we will consider is a revocable living trust. This type of trust is set up while you are alive and in control of all your assets. You have the trust created. Then, you must put most of your assets, like retirement accounts, brokerage and bank accounts, and real estate into the trust. Instead of having the title of Kim and Jim Eyesonthedollar. The account or deed would be named The Trust of Kim and Jim Eyesonthedollar.  You would then name a trustee, usually you and/or your spouse, who controls the assets and income of the trust. You also would name a trustee replacement to take over if you become physically or mentally incapacitated or upon your death.

The main reason to have a trust is if you want your estate to avoid probate after your death. Probate is the process where your will has to go through the court system to give creditors time to claim debts owed to them from your estate. Probate often takes 6 months or more and racks up money in legal fees. With a trust, the assets stay in the trust and pass on to your beneficiaries without this process. If you have property in several states, each one would have to go through a different probate court. In this situation, a trust makes sense.

If your assets are sizeable, estate taxes apply, regardless of whether you have a trust or not.

How Much Does a Trust Cost to Set Up?

The big disadvantage of a trust is the cost of establishment and changing all ownership from your name into the trust. Our quote was $2000 from a trust attorney. If you have a very large estate, I’m sure the cost is even more, but it takes the expense and time of probate away from loved ones after your death. You can set up a trust yourself, but if you don’t change all of your assets over to the trust, it is worthless. I would certainly recommend an attorney if your estate is worth more than $100,000 or if you own property  in multiple states.

Having a Will and a Trust

A trust doesn’t cover personal property or custody issues of minor children. If you have a trust for most of your assets, you still need a will that specifies those issues.

Hopefully, you will also have enough life insurance to make sure your heirs’ immediate needs are met.  You don’t want them to guess how to divide assets or take care of the children after you’re gone. Estate planning might not be the best way to spend a weekend, but you will rest better once your wishes are in place.

 

About Kim Parr

Kim Parr is a private practice optometrist, freelance writer, and personal financial blogger. You can follow her journey to 20/20 financial vision at Eyes on the Dollar.

8 comments

  1. I’m not sure when you got your site designed, but I love it!

    Trusts and wills are very important. With my day job, I work with trusts pretty much all day long. They are very helpful!

    • Thanks Michelle, it isn’t completely done yet, but the theme was changed yesterday. I think we will eventually set up a trust, but the cost was a bit prohibitive at the moment.

  2. I also like the new design…I have to do something about mine…I’ve been putting it off. I think Trusts can be a good tool, especially if you have a good amount of assets. But it is not necessary for everyone. My dad was thinking about creating one, but his main asset is a house which is jointly owned with my mother. Probate doesn’t necessarily have to take a long time if there are that many assets and no one disputing the will. Definitely agree that if you own property in different states that a trust is the way to go.

  3. Dear Kim,
    I found this very simple, thanks!
    I kinda had that banging around in the back of my mind as to what exactly was the difference and why you would want both. One question: after you set up a trust does it have an annual fee? Or the quoted price will cover it from the beginning to the end?

    • That is a very good question. I think as long as you don’t make any changes, you should be good. If you add property or accounts, you’d have to add them to the trust. If a lawyer is handling it for you, I’m sure you’d have to pay them, but certainly a wonderful thing to bring up when we do decide to move forward with a trust.

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