Estate planning

Estate planning refers to the organized approach to managing the accumulated assets of a person
in the interest of the intended beneficiaries.

Without proper estate planning there could be disputes, conflicting claims, legal battles,
unavoidable taxes and unstructured payoffs that may not be in the best interest of the
beneficiaries.

Estate
The term estate includes all the assets and liabilities belonging to the deceased person.
The properties could be like cash, jewelry, house, car, land, stocks etc. which would be passed to
intended beneficiaries providing legal ownership to them.
In case any claims or debt need to be settled that too would be responsibility of the beneficiaries.
The primary purpose of estate planning involves declaration of will, formation of trust,
designation of beneficiaries, power of attorney, property ownership rights and charity.
Inestate
If a person dies without making a will, he is said to have died “intestate” and in such case his
property will be inherited by his heirs in accordance with laws of succession applicable to him.
This may lead to undesirable distribution of property.

Succession is governed by personal laws, which will apply in the case of intestate death.
Different personal laws apply as follows:
The Hindu Succession Act, 1956 (Applicable to Hindus, Buddhists, Jains and Sikhs)
Indian Succession Act, 1925 (Applicable to Christians, Jews and Parsis)
Mohammedan Personal laws (Governing inheritance of Muslims)

Will - “Will” is defined in Section 2(h) of the Indian Succession Act to mean the “legal
declaration of the intention of the testator with respect to his property, which he desires to be
carried into effect after his death.”
Testator - The person making the will is the testator, and his rights extend to what are legally his
own. The will comes into effect only after the death of the testator.

Legatee - The person who is named in a will to receive a portion of the deceased person’s estate
is known as a legatee.

Executor - The person named in the will to administer the estate of the deceased person is termed
as an Executor.

Trust - A trust is an arrangement where you entrust property to an organization with confidence
accepted by the trustees to work in the benefit of beneficiaries.
Parties involved –
Trustee: One who accepts the legal title and exercises control over the trust property in the
interest of the beneficiary.
Beneficiary: The persons for whose benefit the trust is created is the beneficiary.
Trust Deed: The trust deed defines the purpose of the trust, the beneficiaries, the property of the
trust and power of the trustees, among others.

Understanding Estate Planning

Estate planning involves determining how an individual’s assets will be preserved, managed, and
distributed after death. It also takes into account the management of an individual’s properties
and financial obligations in the event that they become incapacitated.

Assets that could make up an individual’s estate include houses, cars, stocks, artwork, life
insurance, pensions, and debt. Individuals have various reasons for planning an estate, such as
preserving family wealth, providing for a surviving spouse and children, funding children's or
grandchildren’s education, or leaving their legacy behind to a charitable cause.

The most basic step in estate planning involves writing a will. Other major estate planning tasks
include the following:

 Limiting estate taxes by setting up trust accounts in the names of beneficiaries

 Establishing a guardian for living dependents
 Naming an executor of the estate to oversee the terms of the will
 Creating or updating beneficiaries on plans such as life insurance, IRAs, and 401(k)s
 Setting up funeral arrangements
 Establishing annual gifting to qualified charitable and non-profit organizations to reduce
the taxable estate
  Setting up a durable power of attorney (POA) to direct other assets and investments

4 Reasons Estate Planning Is So Important

It’s all about protecting your loved ones
1. An Estate Plan Protects Beneficiaries
If estate planning was once considered something that only high net worth individuals needed,
that’s changed. Nowadays many middle-class families need to plan for when something happens
to a family’s breadwinner (or breadwinners). After all, you don’t have to be super-rich to do well
in the stock market or real estate, both of which produce assets that you’ll want to pass on to
your heirs.

Even if you’re only leaving behind a second home, if you don’t decide who receives the property
when you pass away you won’t have any control over what happens to it.

That’s because the main component of estate planning is designating heirs for your assets,
whether it’s a summer house or a stock portfolio. Without an estate plan, the courts will often
decide who gets your assets, a process that can take years, rack up fees, and get ugly. After all, a
court doesn’t know which sibling has been responsible and which one shouldn’t have free access
to cash. Nor will the courts automatically rule that the surviving spouse gets everything.

If you die without a will, which is a vital part of an estate plan, the courts will decide who gets
your assets.

2. An Estate Plan Protects Young Children

Nobody thinks of dying young, but if you’re the parent of small children, you need to prepare for
the unthinkable. This is where the will portion of an estate plan comes in.

To ensure that your children are cared for in a manner of which you approve, you’ll want to
name their guardians in the event that both parents die before the kids turn 18. Without a will
that names these guardians, the courts will step in to decide who will raise your children. 1

3. An Estate Plan Spares Heirs a Big Tax Bite

Estate planning is all about protecting your loved ones, which means in part giving them
protection from the Internal Revenue Service (IRS). Essential to estate planning is transferring
assets to heirs with an eye toward creating the smallest possible tax burden for them.

Even just a bit of estate planning can enable couples to reduce much or even all of their federal
and state estate taxes and state inheritance taxes. There are also ways to decrease the income tax
beneficiaries might have to pay. Without a plan, the amount that your heirs will owe Uncle Sam
could be quite a lot.

4. An Estate Plan Eliminates Family Messes

We’ve all heard the horror stories. Someone with money dies and the war between family
members begins. One sibling may think they deserve more than another, or one sibling may
think they should be in charge of the finances even though they're notorious for racking up debt.
Such squabbling can get ugly and end up in court, with family members pitted against one
another.

Stopping fights before they start is yet another reason why an estate plan is necessary. This will
enable you to choose who controls your finances and assets if you become mentally
incapacitated or after you die and will go a long way toward quelling any family strife and
ensuring that your assets are handled in the way that you intended.

What Does Estate planning include and how it is calculated?

The estate of an individual includes all the assets, title, or ownership of the assets, i.e., whether in
the name of the individual or jointly owned with a spouse, parent, business partner, or other
individuals.

The assets of the individual that are considered as a part of your estate:

 Financial Accounts
Individual’s savings account in a bank, retirement accounts, stocks and bonds, life insurance
returns, etc.

 Money Owed to the individual

Tax rebate, Patrimony funds, outstanding loans the debtors, etc.

 Investments
Home or commercial property, besides any other land or property you own, etc.

 Other Assets
Vehicles, furniture, jewelry, art, etc.

 The fair market value of the above-mentioned assets is calculated after deducting the
debts of the individual owe like mortgages and loans, added up to estimate the value of
the estate. The tax will be charged after the death is decided based on the value of the
estate. Further, it is also considered that whether capital gains taxes will have to be paid
by the beneficiaries or not.
Possible taxes are considered while doing estate planning and ensuring that there are enough
funds available to cover them.

Assets Which Are Controlled by a Will

All assets which are owned by you do not always form a part of your estate and are not
controlled by your Will.

Joint ownership assets

Assets which you hold jointly with another person including your spouse and parents will pass
on directly to the other person upon your death, irrespective of your Will.

Usually, these assets include home or real estate, bank accounts and personal properties.

Sole ownership

Assets which are in your sole name and not jointly owned, will form a part of your estate and be
controlled by your Will. These assets include real estate, cash, motor vehicles, shares,
debentures, bonds and units in trusts.

Unit trusts or companies

Assets owned by unit trusts or companies will not become a part of your estate, if such trusts and
companies are controlled by you. However, the shares and units of the trusts and companies will
form a part of your estate.

Life Insurance

In most of the cases, a person who is insured in a life insurance policy nominates another person
such as spouse or children as the beneficiaries of the policy and not the estate as the beneficiary.
In such circumstances, the proceeds of the policy are paid directly to the beneficiaries and do not
form a part of the estate of the deceased.

Superannuation
In cases where your assets are held by a superannuation fund, those assets are usually passed on
to your dependents such as spouse or children and do not form a part of your estate.

Writing a Will
A will is a legal document created to provide instructions on how an individual’s property and
custody of minor children, if any, should be handled after death. The individual expresses their
wishes through the document and names a trustee or executor that they trust to fulfill their stated
intentions. The will also indicates whether a trust should be created after death. Depending on
the estate owner’s intentions, a trust can go into effect during their lifetime (living trust) or after
their death (testamentary trust).

The authenticity of a will is determined through a legal process known as probate. Probate is the
first step taken in administering the estate of a deceased person and distributing assets to the
beneficiaries. When an individual dies, the custodian of the will must take the will to the probate
court or to the executor named in the will within 30 days of the death of the testator.

The probate process is a court-supervised procedure in which the authenticity of the will left
behind is proved to be valid and accepted as the true last testament of the deceased. The court
officially appoints the executor named in the will, which, in turn, gives the executor the legal
power to act on behalf of the deceased.
Appointing the Right Executor
The legal personal representative or executor approved by the court is responsible for locating
and overseeing all the assets of the deceased. The executor has to estimate the value of the estate
by using either the date of death value or the alternative valuation date, as provided in
the Internal Revenue Code (IRC).1

A list of assets that need to be assessed during probate includes retirement accounts, bank
accounts, stocks and bonds, real estate property, jewelry, and any other items of value. Most
assets that are subject to probate administration come under the supervision of the probate court
in the place where the decedent lived at death.

The exception is real estate, which must be probated in the county in which it is located.

The executor also has to pay off any taxes and debt owed by the deceased from the estate.
Creditors usually have a limited amount of time from the date they were notified of the testator’s
death to make claims against the estate for money owed to them. Claims that are rejected by the
executor can be taken to court where a probate judge will have the final say as to whether or not
the claim is valid.

The executor is also responsible for filing the final personal income tax returns on behalf of the
deceased. After the inventory of the estate has been taken, the value of assets calculated, and
taxes and debt paid off, the executor will then seek authorization from the court to distribute
whatever is left of the estate to the beneficiaries.

Any estate taxes that are pending will come due within nine months of the date of death.

Planning for Estate Taxes

Federal and state taxes applied to an estate can considerably reduce its value before assets are
distributed to beneficiaries. Death can result in large liabilities for the family, necessitating
generational transfer strategies that can reduce, eliminate, or postpone tax payments.

During the estate-planning process, there are significant steps that individuals and married
couples can take to reduce the impact of these taxes.

AB Trusts
Married couples, for example, can set up an AB trust that divides into two after the death of the
first spouse.

Education Funding Strategies

A grandfather may encourage his grandchildren to seek college or advanced degrees and thus
transfer assets to an entity, such as a 529 plan, for the purpose of current or future education
funding. That may be a much more tax-efficient move than having those assets transferred after
death to fund college when the beneficiaries are of college age. The latter may trigger
multiple tax events that can severely limit the amount of funding available to the kids.
Cutting the Tax Effects of Charitable Contributions
Another strategy an estate planner can take to minimize the estate’s tax liability after death is by
giving to charitable organizations while alive. The gifts reduce the financial size of the estate
since they are excluded from the taxable estate, thus lowering the estate tax bill. 3

As a result, the individual has a lower effective cost of giving, which provides additional
incentive to make those gifts. And of course, an individual may wish to make charitable
contributions to a variety of causes. Estate planners can work with the donor in order to
reduce taxable income as a result of those contributions or formulate strategies that maximize the
effect of those donations.3

Estate Freezing
This is another strategy that can be used to limit death taxes. It involves an individual locking in
the current value, and thus tax liability, of their property, while attributing the value of future
growth of that capital property to another person. Any increase that occurs in the value of the
assets in the future is transferred to the benefit of another person, such as a spouse, child, or
grandchild.

This method involves freezing the value of an asset at its value on the date of transfer.
Accordingly, the amount of potential capital gain at death is also frozen, allowing the estate
planner to estimate their potential tax liability upon death and better plan for the payment of
income taxes.

Using Life Insurance in Estate Planning

Life insurance serves as a source to pay death taxes and expenses, fund business buy-sell
agreements, and fund retirement plans. If sufficient insurance proceeds are available and the
policies are properly structured, any income tax on the deemed dispositions of assets following
the death of an individual can be paid without resorting to the sale of assets. Proceeds from life
insurance that are received by the beneficiaries upon the death of the insured are generally
income tax-free.4

Estate planning is an ongoing process and should be started as soon as an individual has any
measurable asset base. As life progresses and goals shift, the estate plan should shift in line with
new goals. Lack of adequate estate planning can cause undue financial burdens to loved ones
(estate taxes can run as high as 40%), so at the very least a will should be set up—even if the
taxable estate is not large.

Will vs. Trust: What's the Difference?

Wills and trusts are both estate planning tools that can help ensure your assets are protected and
bequeathed to your heirs, besides your spouse, which is generally not an issue. This is because
the unlimited marital deduction provision within the United States Estate and Gift Tax Law
allows the passing of wealth to a surviving spouse without incurring gift or estate tax liabilities.1

However, the transfer process becomes much more involved when wealth is passed to a
subsequent generation. It is possible to have both a will and a trust.
A will is a written document expressing a deceased person's wishes, from naming guardians of
minor children to bequeathing objects and cash assets to friends, relatives, or charities. A will
becomes active only after one's death. A trust is active the day you create it, and a grantor may
list the distribution of assets before their death in it, unlike a will. There are irrevocable trusts,
often created for tax purposes, which cannot be altered after their creation, and living trusts,
which can be changed by the grantor.

All wills must go through a legal process called probate, where an authorized court administrator
examines them. This process can be lengthy and potentially contentious if family members
contest the will. Trusts are not required to go through probate when the grantor dies, and they
cannot be contested.

For this article, we will examine how these estate planning tools can be used to provide for your
heirs, including:

 Whether you need a will, a trust, or both

 The different types of trusts
 The advantages and disadvantages of wills and trusts

Wills
A will is a legal document that sets forth your wishes regarding the distribution of your property
and the care of any minor children. If you die without a will, those wishes may not be carried
out. Further, your heirs may end up spending additional time, money, and emotional energy to
settle your affairs after you're gone.

Wills can vary in their effectiveness, depending on the type, though no document will likely
resolve every issue that arises after your death. Here's what you need to know about these vital
documents.

Why You Should Have a Will

Some people think that only the very wealthy or those with complicated assets need wills.
However, there are many good reasons to have a will.

 You can be clear about who gets your assets. You can decide who gets what and how
much.
 You can keep your assets out of the hands of people you don't want to have them (like an
estranged relative).
 You can identify who should care for your children. Without a will, the courts will
decide.
 Your heirs will have a faster and easier time getting access to your assets.
 You can plan to save your estate money on taxes. You can also give gifts and charitable
donations, which can help offset the estate tax.

A Written, Witnessed Will Is Best

To maximize the likelihood that your wishes will be carried out, create what's known as
a testamentary will. This is the most familiar type of will; you prepare the document and then
sign it in witnesses' presence. It's arguably the best insurance against successful challenges to
your wishes by family members or business associates after you die. You can write one yourself
but have it prepared by a trusts and estates attorney for greater insurance.

Other Types of Inheritance Wills

While a testamentary will is likely your best bet, several other types of wills get varying degrees
of recognition.

Holographic wills
Wills written and signed by the testator but not witnessed are known as holographic wills—from
the less common secondary meaning of the word holograph, meaning a document hand-written
by its author. Such wills are often used when time is short and witnesses are unavailable, for
example, when the testator is trapped in a life-threatening accident.

Holographic wills are not recognized in some states, however. In states that permit the
documents, the will must meet minimal requirements, such as proof that the testator wrote it and
had the mental capacity to do so. Even then, the absence of witnesses often leads to challenges to
the will's validity.

Oral wills
Least widely recognized are oral wills, in which the testator speaks their wishes before witnesses.
Lacking a written record, or at least one prepared by the testator, courts do not widely recognize
oral wills.

Pour-over wills
Another type of will, a pour-over will, is used in conjunction with creating a trust into which
your assets flow. (See "Wills and Trusts" below.)

Mutual wills
A married or committed couple usually executes this type of will. After one party dies, the
remaining party is bound by the terms of the mutual will.

Mutual wills can be used to ensure that property passes to the deceased’s children rather than to a
new spouse. Because of state differences in contract law, a mutual will should be established
with a legal professional's help. Though the terms sound similar, a mutual will should not be
confused with a joint will.

What Does a Will Cover?

A will allows you to direct how your belongings—such as bank balances, property, or prized
possessions—should be distributed. If you have a business or investments, your will can specify
who will receive those assets and when.

A will also allows you to direct assets to a charity (or charities) of your choice. Similarly, if you
wish to leave assets to an institution or an organization, a will can assure that your wishes are
carried out.
While wills generally address the bulk of your assets, some aren't covered by their instructions.
Those omissions include payouts from the testator's life insurance policy. Since the policy has
specified beneficiaries, those individuals will receive the proceeds. The same will likely apply
for any investment accounts that are designated as "transfer on death."

There's a key exception: If the beneficiaries of those assets predeceased the testator, the policy or
account then reverts to the estate and is distributed according to the terms of a will or, failing
that, by a probate court—a part of the judicial system that primarily handles wills, estates, and
related matters.

Most states have elective-share or community property laws that prevent people from
disinheriting their spouses.1 If a will assigns a smaller proportion of such assets to the surviving
spouse than state law specifies, which is typically between 30% and 50%, a court may override
the will.

In addition to directing your assets, a will states your preferences for who should take over as
guardian for your minor children in the event of your death.

Where to Keep a Will

A probate court usually requires access to your original will before it can process your estate. It's
crucial, then, to keep the document where it is safe and yet accessible. Avoid storing it in a bank
safety deposit box or in any other location where your family may need a court order to gain
access. A waterproof and fireproof safe in your house is a good alternative.

Then let at least your executor know where the original will is stored, along with needed
information such as the password for the safe. Besides, it's wise to duplicate signed copies to the
executor and your attorney if you have one. The signed copies can be used to establish your
intentions in case the original is destroyed or lost. However, the absence of an original will can
complicate matters, and without it, there's no guarantee that your estate will be settled as you'd
hoped. So store the document with care.

How to Change a Will

Your will may never need to be updated. Or, you may choose to update it regularly. Remember,
the only version of your will that matters is the most current valid one in existence at the time of
your death.

A good rule of thumb: Review your will every two or three years and at pivotal moments in your
life. Such events might include marriage, divorce, or the birth of a child. Your kids probably
won't need guardians named in a will after they're adults, for example.

Changing your will is easy. You write a new will to replace the old one or make an addition
using an amendment known as a codicil. Because of the serious nature of codicils and their
power to change the entire will, two witnesses are usually required to sign when a codicil is
added, much like when the original will was created. Some states, however, have loosened the
legal regulations surrounding codicils and now allow for them to be notarized at a public notary.
Ideally, you want to make any changes when you are of sound mind and in good health. This
limits the likelihood that your wishes can be successfully challenged and avoids decisions made
in haste or under intense emotional pressure.

Estate Planning: 16 Things to Do Before You Die

1. Itemize Your Inventory

To start things out, go through the inside and outside of your home, and make a list of all
valuable items. Examples include the home itself, television sets, jewelry, collectibles, vehicles,
art and antiques, computers or laptops, lawn equipment, and power tools.

The list will probably be a good deal longer than you may have expected. As you go, you may
want to add notes if someone comes to mind that you'd like to have the item after your death.

2. Follow with Non-Physical Assets

Next, start adding your non-tangible assets to your list, such as things you own on paper or other
entitlements that are predicated on your death. Items listed here would include brokerage
accounts, 401(k) plans, IRAs, bank accounts, life insurance policies, and other policies such as
long-term care, homeowners, auto, disability, and health insurance.

Include all account numbers and list the location of any physical documents you have in your
possession. You may also want to list contact information for the firms holding these non-
physical possessions.

3. Assemble a List of Debts

Then, make a separate list for open credit cards and other obligations you may have. This should
include items such as auto loans, mortgages, home equity lines of credit (HELOCs), and any
other debts you might owe. Again, add account numbers, the location of signed agreements, and
the contact information of the companies holding the debt.

Include all your credit cards, noting which ones you use regularly and which ones tend to sit in a
drawer unused.

It's generally a good practice to run a free credit report at least once a year. This will also identify
any credit cards you may have forgotten you have.

4. Make a Memberships List

If you belong to any organizations such as the AARP, The American Legion, a veteran's
association, a professional accreditation association, or a college alumni group, make a list of
them. In some cases, these organizations may have accidental life insurance benefits (at no cost)
on their members, and your beneficiaries may be eligible to collect.

Include any other charitable organizations that you support. It's also a good idea to let your
beneficiaries know which charitable organizations or causes are close to your heart and to which
you might like donations to go in your memory.
5. Make Copies of Your Lists
When your lists are completed, you should date and sign them and make at least three copies.
The original should be given to your estate administrator (more on that person later). The second
copy should be given to your spouse (if you're married) and placed in a safe deposit box. Keep
the last copy for yourself in a safe place.

6. Review Your Retirement Accounts

Accounts and policies that have designated beneficiaries will pass directly to those people or
entities upon your death. It does not matter how you direct that these accounts or policies be
distributed in your will or trust. The beneficiary designations associated with the retirement
account will take precedence.

Contact your employer's customer service team or plan administrator for a current listing of your
beneficiary selection for each account. Review each of these accounts to make sure the
beneficiaries are current and listed exactly as you like. This is especially important if you have
divorced and remarried.

7. Update Your Insurance

As with retirement accounts, life insurance and annuities will pass directly to beneficiaries. It is
important to contact all life insurance companies where you maintain policies to ensure that your
beneficiaries are up-to-date and listed correctly.

8. Assign Transfer on Death Designations

Assets bequeathed in a will often go through probate, as do assets if someone dies intestate. This
process, in which your assets are distributed per court instruction, can be costly and time-
consuming.

However, many accounts, such as bank savings, CD accounts, and individual brokerage
accounts, are unnecessarily probated every day. If you hold these accounts, they can be set up—
or amended—to have a transfer on death (TOD) designation, which lets beneficiaries receive
assets without going through the probate process. Contact your custodian or bank to set this up
on your accounts.

9. Select a Responsible Estate Administrator

Your estate administrator or executor will be in charge of administering your will when you die.
It is important that you select an individual who is responsible and in a good mental state to
make decisions.

Don't immediately assume that your spouse is the best choice. Think about how emotions related
to your death will affect this person's decision-making ability. If you foresee an issue, consider
other qualified individuals.

10. Draft a Will

Everyone over age 18 should have a will. It is the rulebook for the distribution of your assets,
and it could prevent havoc among your heirs. A will can also name a guardian for your minor
children, and designate who should care for your pets. You can leave assets to charitable
organizations through your will, too.

Wills are fairly inexpensive estate-planning documents to compose; many attorneys can help you
craft a will for less than $1,000, depending on the complexity of your assets and your geographic
location. You can also write your own will with the assistance of online services or other
software packages.

Make sure that you sign and date your will, in front of two non-related witnesses who should
also sign the document, and have it notarized. Finally, make sure other people know the location
of the document so they may access it when needed.

11. Regularly Review Your Documents

Review your will for updates at least once every two years and after any major life-changing
events (marriage, divorce, the birth of a child, and so on). Life is constantly changing, and your
assets and wishes are likely to change from year to year, too.

12. Copy the Administrator

Once your will is finalized, signed, witnessed, and notarized, you will want to make sure that
your estate administrator gets a copy. If the original is not being kept in your home (for example,
it's at your attorney's office), you should also keep a copy in a safe place at home.

Bear in mind that while you can make copies, only the original will—the "wet signature"
document, in estate-planning lingo—can be filed for probate.

13. Visit an Estate Attorney and/or a Financial Planner

While you may think that you've covered all your bases, it may be a good idea to consult with a
professional on a full investment and insurance plan. And if it's been a while, you may want to
revisit your plan. As you get older, your needs may change, such as figuring out if you
need long-term care insurance and protecting your estate from a large tax bill or lengthy court
processes. Professionals will also be up on changes in legislation and income or estate tax laws,
which could impact your bequests.

14. Simplify Your Finances

If you've changed jobs over the years, it's quite likely that you have several different 401(k)
retirement plans still open with past employers or maybe even several different IRA accounts.
You may want to consider consolidating these accounts into one individual IRA. Consolidating
of accounts allows for better investment choices, lower costs, a larger selection of investments,
less paperwork, and easier management.

15. Complete Other Important Documents

At a minimum, you should create a will, power of attorney, healthcare proxy, and living will.
Your will should also assign guardianship for your minor children as well as any pets. Consider
setting up both financial and medical powers of attorney so that people you trust will be there
handling your affairs should something happen to you.
You can also write a letter of instruction to leave step-by-step instructions as well as spell out
your personal wishes for things like your funeral or what to do with your digital assets like social
media accounts. If you're married, each spouse should create a separate will, with plans for the
surviving spouse. Finally, make sure that all the concerned individuals have copies of these
documents.

16. Take Advantage of College Funding Accounts

You may want to set up 529 college savings plans for your grandchildren. In these plans, savings
grow tax-free, and many states offer tax deductions for the person contributing the funds.

The most common type of will is called a testamentary will. It is a legally enforceable document
stating how you want your affairs handled and assets distributed after you die. It can also include
a directive of how you want your funeral or memorial held. A will is an important component of
estate planning, and a number of online will makers offer tools for generating legal forms and
documents. Experts suggest seeking legal counsel from an attorney that can take into account
your individual estate-planning needs.

This is what you can find in a will: a list of assets and debts, including any family heirlooms, the
contents of safe deposit boxes, property, and vehicles. You can leave your possessions to heirs,
friends, or charities.

A will can be effective in an estate transfer and other legal proceedings after death, but there are
drawbacks that you should be aware of. Your estate will become part of the public record, for
example, and anything left by a will must go through probate court. Also, probate attorneys can
be expensive and cannot be avoided except in California and other specific states. 2 Retirement
accounts and life insurance policies pass straight to named beneficiaries do not go through the
probate process.

Guardianship of Minor Children

If you have minor-aged children at home, it's important to have a will that appoints guardianship
of your children. If a guardian is not appointed at the time of death, your surviving
family will have to seek help in a probate court to have a guardian appointed for your
children. The person appointed may not be one whom you would have wanted to be entrusted
with your kids.

It would be best to consider how you will pass a portion of your estate to a minor child through a
will. A will places your decisions in the hands of the judge presiding over your estate
transfer. Your testamentary will carries out your wishes from beyond the grave. A will also allow
you to give insight and direction over the handling of assets your beneficiaries will
receive. Within reason, you can address how you would like them to use what you have left
them.
Disinheritance
While children (natural or adopted) have a statutory right to inherit, a will allows you to
disinherit a child if you choose to do so (check your state laws for the specific details about
this). A person can disinherit a spouse as well, under certain circumstances.

However, you will need to be aware of the laws governing your state—whether it is a common-
law state, a community property state, or an equitable distribution state; a person may only
disinherit a spouse in a community property state. Each has a different set of stipulations on what
and how much can be disinherited. Note, too, that a person can only disinherit a spouse or child
through a will.

What if I Die Without a Will?

If you die without a will, called intestate, the state gets involved, and it will oversee the
distribution of your assets. If you have minor children and die intestate, the court will appoint a
guardian. Besides, the courts follow a set formula of how to divide assets, and it could result in
actions that could negatively impact a surviving spouse or child.

A will protects survivors against estate tax liability as well. As of 2021, U.S. estate tax returns
are required to be filed if your estate is valued at $11.7 million ($11,580,000 for 2020). 3 If your
estate is worth less than this figure, there is no tax return required, and you will not be charged
an estate tax.

Trusts
A trust is another method of estate transfer—a fiduciary relationship in which you give another
party authority to handle your assets for the benefit of a third party, your beneficiaries.

A trust can be created for a variety of functions, and there are many types of trusts. Overall,
however, there are two categories: living and testamentary. A will can be used to create
a testamentary trust. You can also create a trust for the primary purpose of avoiding probate
court, called a revocable living trust.

Living Trust
Let's focus on a revocable living trust for estate transfer. Like a will, a trust will require you to
transfer property after death to loved ones. It is called a living trust because it is created while the
property owner, or trustor, is alive. It is revocable, as it may be changed during the life of the
trustor. The trustor maintains ownership of the property held by the trust while the trustor is
alive.

The trust becomes operational at the trustor’s death. Unlike a will, a living trust passes property
outside of probate court. There are no court or attorney fees after the trust is established. Your
property can be passed immediately and directly to your named beneficiaries.

Testamentary Trust
Trusts tend to be more expensive than wills to create and maintain. A trustee will be named in
the document to control the assets' distribution following the trustor's wishes, following the trust
document and its mandates. This is also an effective way to control the passing of your estate
beyond the grave.

A declaration of trust will also provide the basic terms of the trust. Your estate stays private and
passes directly to your heirs, you do not pay a probate attorney or court costs, and your loved
ones may be able to avoid being tied up in probate court for what could be a year or more. From
this planner’s perspective, trust can be a fantastic choice for estate transfer.

Special Considerations
Trusts Could Keep Your Heirs Out of Probate Court
One-stop you should try to avoid on the estate-transfer train is probate court. This is where your
heirs could spend months sorting out your estate if your transfer plans are not efficiently laid out.
You could easily lose an additional 2-4% of your estate due to attorney fees and court costs. 4

Probate court is the judicial system section responsible for settling wills, trusts, conservatorships,
and guardianships. After death, this court might examine your testamentary will, which is a legal
document used to transfer your estate, appoint guardians for minor children, select will
executors, and sometimes set up trusts for your survivors.

Your executor would still be responsible for sorting out the estate, which could take 6 to 18
months, depending on the intricacies. Imagine your eldest child spending the next year and a half
traveling back and forth to court hearings when they should be mourning your passing. It doesn’t
sound fun, but it’s a possibility if you haven't left a clear and well-drawn will and/or trust
documents.

Key Differences Between Wills and Trusts

Wills and trusts are both important estate-planning tools, but they differ in important ways. First,
a trust is activated when the grantor signs it. A will does not go into effect until the testator.
Upon your death, your will goes through probate, and a trust does not. A will is where you name
guardianship of any minor children, plus share any funeral or memorial plans or requests.

Wills and Trusts FAQs

What is Better, a Will, or a Trust?
A trust will streamline the process of transferring an estate after you die while avoiding a lengthy
and potentially costly period of probate. However, if you have minor children, creating a will
that names a guardian is critical to protecting both the minors and any inheritance. Deciding
between a will or a trust is a personal choice, and some experts recommend having both. A will
is typically less expensive and easier to set up than a trust, an expensive and often complex legal
document.

Do You Need Both a Trust and a Will?

Nearly everyone should have a will, but not everyone most likely needs a living or irrevocable
trust. If you have property and assets to place in a trust and have minor children, having both
estate-planning vehicles might make sense.
Does a Will Override a Living Trust?
A will and a living trust are two separate legal documents. One doesn't usually trump another,
but if the issue arises, a living trust will most likely override a will because a trust is its own
entity.

How Much Does it Cost to Set Up a Trust?

The cost to set up a trust depends on various factors, including the type of trust, the state you live
in, and how complex the legal document. A simple trust done online with LegalZoom costs less
than $300,6 but an estate planning attorney will most likely charge more.

Estate Planning Strategies

Each year, millions of dollars are spent on soaring attorney and court fees associated with
probate proceedings upon the death of a loved one. Avoiding probate in estate planning allows
the decedent's property to be distributed to the designated person at a designated time without
substantial costs.

Background on the Probate Process

Probate is the process of proving the will is, in fact, the last will, and there are no challenges to it
and of adjudicating any claims against the estate under court supervision. Probate usually occurs
in the appropriate court in the state and county where the deceased permanently resided at the
time of his or her death.

If there is no valid will (called intestacy), the title to the property will pass under state intestacy
laws to "heirs at law," normally giving one half to the surviving spouse and dividing the
remainder equally among the children. With or without a will, the property must go through the
probate proceedings.

Even if a person dies with a will, a court generally must allow others the opportunity to contest
the will. Creditors are allowed to step forward; the validity of the will can be scrutinized, and the
deceased's mental capacity at the time the will was drafted can be questioned.

These proceedings take time and money, and your heirs are the ones who will have to pay. Since
probate proceedings can take up to a year or two, the assets are typically "frozen" until the courts
decide on the distribution of the property. Probate can easily cost from 3% to 7% or more of the
total estate value.

Simplifying or Avoiding Probate Altogether

Even though probate takes place regardless of whether you made a will, you can look to other
tools that help your inheritors.

Transfer Property to a Trust

Revocable living trusts or inter-vivos trusts were invented to help people bypass the probate
process. Unlike the property listed in your will, the property in a trust is not probated, so it passes
directly to your inheritors. You simply create a trust document and then transfer the property title
to the trust. Many people name themselves as the trustee to keep total control of the trust
property.

A trust also allows you to name alternate beneficiaries; it does not require a waiting period after
death and is much harder to attack in court.

Set up Payable-on-Death Registrations

Also known as transfer-on-death accounts, these allow you to name one or more beneficiaries of
the account to avoid the probate process. It's simple to create and usually free, and the
beneficiary can easily claim the money after the owner dies.

The ability to name a beneficiary, however, is a feature that you must add to the account, but
most banks, savings and loans, credit unions, and brokerage firms allow you to do so. It requires
some extra paperwork and time, so you'll need to be persistent and ask your institution for the
required forms.

Make Tax-Free Gifts

Making gifts helps you avoid probate for a very simple reason: you no longer own the property
when you die. For tax years 2020 and 2021, you can give your heirs up to $15,000 per person
each year without a gift tax penalty.1 Giving before you die helps lower your probate costs
because, typically, the higher the monetary value of assets going through probate, the higher the
probate costs.

Revisit the Beneficiary Designations on Your Stuff

Dust off that old life insurance policy and make sure your beneficiaries are up to date. Too many
times, individuals forget to change their beneficiary after their second marriage, and then the ex-
spouse gets everything. Call your custodians and update the beneficiaries on your IRAs, 401(k),
life insurance policies, annuity contracts, and other retirement accounts.

How Does the New Tax Law Affect Your Estate Plan?

These types of accounts pass at your death by contractual beneficiary designation, meaning
whoever you name in your will is irrelevant to these accounts; beneficiary designation will take
precedence in court. Avoid naming your estate as the beneficiary, which will cause your property
to go through probate.

Use Joint Ownership

Joint tenancy with right of survivorship, tenancy by the entirety, and community property with
right of survivorship are the types of joint ownership that allow your property to bypass the
probate process. If you hold your stocks, vehicles, home, and bank accounts in joint ownership,
the title of the property automatically passes to the joint survivor upon your death. Remember,
once you title your property jointly, you'll be giving up half ownership in the property.