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.