This week, Angela discusses estate planning during Estate Planning Awareness Month, focusing on the differences between will-based and trust-based plans. She emphasizes the importance of having a comprehensive estate plan to avoid complications for heirs and highlights the potential pitfalls of relying solely on a will.
Key Takeaways
- Will Limitations: A will only covers assets not already designated by beneficiary or titling, acting like a vacuum cleaner that picks up leftover pieces. Contract property, such as IRAs with named beneficiaries or bank accounts with payable-on-death designations, supersedes the will, potentially leading to unintended disinheritance. Executors must itemize, value, and probate all remaining assets, which can be time-consuming and costly.
- Asset Inventory Exercise: To assess estate complexity, listeners are encouraged to list all assets, including cash, personal possessions, bank accounts, investments, online accounts, and business interests, with values. They should then verify how each asset is titled and what happens upon death, as assumptions often lead to surprises. This exercise mirrors the homework an executor would face, revealing that even modest estates can be complicated.
- Probate Challenges: Probate involves retitling assets twice: first to the estate and then to beneficiaries, and can be costly, especially in states like Wyoming with hefty fees. Even in Texas, a 'friendly' state, finding and valuing assets can take years, as illustrated by a family still uncovering assets 12 years later. Properly set up contract property can avoid probate, but it may not always align with wishes, such as when a beneficiary dies.
- Trust-Based Plan Benefits: A living trust, when properly funded, acts as the primary estate plan, with a pour-over will catching any missed assets. Titling assets to the trust avoids probate, consolidating everything into one 'toy box' for trustees and executors. This simplifies administration and can be less expensive overall than a will-based plan, despite upfront costs.
- Trust Misconceptions: Trusts are often misused, and a trust does not provide tax benefits, asset protection, or privacy changes. The key is to properly retitle assets into the trust; otherwise, it offers no advantage. A good trust document makes funding seamless, but a poorly drafted one can create complications.
