The short answer is no but before that, a bit about why everyone should have an estate plan.
Imagine you have little kids and something bad happens to both of you and you don’t have an estate plan, the state gets to decide who raises your kids and who gets your money. Estate planning is all about you documenting your wishes instead of letting the state decide for you.
A good friend of mine brought up Trust&Will where you can get your estate planning done for a good price. Another option that you may consider is FreeWill. I have yet to try either of them, but they look legit, and I plan to use them the next time I update my plan. I do that every time there is a major life event which happens to be the case for me.
You either need a Will or a Revocable Living Trust as part of your estate plan. The choice between the two comes down to whether you want to avoid the probate process or not.
Probate is a legal process in which the court determines the validity of a Will and then executes the demands of the said Will. As long as you have done a decent job at naming beneficiaries for your assets, the probate process is in fact a good thing as in the rare off situations, it protects inheritors from potential conflicts of interest and malfeasance by the executor.
In fact, the most important job in the estate planning process is identifying a good executor who will faithfully and systematically carry out your wishes. The rest of the stuff is mere paperwork.
Back to avoiding probate, a Revocable Living Trust bypasses the probate process. This argument is what gets sold most times to steer people towards a Revocable Living Trust rather than a simple Will but you don’t need the added complications and cost that comes with a Trust if your sole goal is to avoid the probate process because…
- The beneficiary designations in your retirement accounts like IRAs and 401(k)s supersede all other documentation. The money in these accounts flows directly to your beneficiaries without much intervention from the system.
- Life insurance proceeds also flow to the assigned beneficiaries outside of the probate process.
- For the rest of your accounts, if you have Transfer-On-Death (TOD) designations in place, the assets will transfer over according to your wishes outside of the court system.
- Transfer of real assets like a home is usually the reason people opt for a Revocable Living Trust but even there, you can add a TOD deed to pass down your home to your beneficiaries without much court intervention.
And if you do opt for a Revocable Living Trust, you must make sure to fund that Trust by retitling the deed to your home and your other non-retirement assets to that Trust’s name. Not doing that defeats the purpose of creating the Trust.
And besides the decision to choose between a Trust or a Will, there are other equally important things that you need to include as part of your estate plan. And they apply regardless of the option you choose.
- Advanced Healthcare Directive: A legal document that allows you to make your wishes known regarding your medical care in advance if you’re ever unable to do so.
- HIPAA Authorization: Authorizes trusted individuals to receive your protected health information for specified purposes.
- Power of Attorney: This is a legal document that lets you appoint someone to act on your behalf in case you are unable to. The appointee will then be able to manage your personal, financial, and medical affairs if you are away or incapacitated. I’d ideally keep this the same person as the executor of my estate.
Chris Farrell in his book, The New Frugality: How to Consume Less, Save More. and Live Better, gives some great pointers on how to decide between a Will or a Trust. A verbatim excerpt below…
A trust is a legal entity created by a property owner that protects and distributes the property according to the owner’s wishes. One reason more people are turning to trusts is that the estate avoids probate, and probate has a terrible reputation. A probate court administers a person’s will. It’s the legal process of selling an estate and your will becomes a public document. But probate is not as bad as it’s often alleged. And in far too many cases trusts are sold to people who really don’t need them. There are many different types of trusts. They can be complex. Here are a couple of questions to ask if you’re wondering if a trust should be in your future.
- Are any of your beneficiaries physically or mentally handicapped?
- Do you or your beneficiaries need protection from creditors?
- Is there a relative you don’t want to include as a beneficiary?
- Is there a business, property, or a financial portfolio that needs professional management?
- Do you want to control how your estate is used after your death?
- Do you want to restrict access to your estate by your heirs until they reach a certain age?
- Is there substantial property in several states?
- Do you want to keep prying eyes away from your financial affairs?
If the answer is yes to these questions (or some of them), I would talk to an estate lawyer.
The New Frugality: How to Consume Less, Save More. and Live Better by Chris Farrell
I like to keep things simple, so I’d opt for a Will in 95% of the cases but if you do decide to do a Trust, make sure to follow through on funding that trust.
Thank you for your time.
Cover image credit – Pixabay