Create a will.
Without a will, the courts decide what happens to everything you leave behind: Your kids, your money, the house, the family dog, … everything!
Ask yourself this simple question:
If my spouse and I were to get hit by a car tonight, is there anything in place to protect all of those things I just mentioned?
If the answer is “no”, then you absolutely need to sit down and do a little estate planning.
I know … it’s hard. It’s not fun to think about times when you’re not here anymore. It took me battling cancer and a few other scary events for us to finally call a lawyer and make it happen.
But it’s done now, and I’m glad we did it. Not just because we finally created our will, but because we also found out that a will is not nearly enough …
Why a Will Doesn’t Do Much for You
This may come as a surprise to you, but a will doesn’t do a whole hell of a lot for you.
It’s necessary; don’t get me wrong. A will tells the courts how your assets should be divided up and where things should go. But in our modern times (as I’ve come to learn), estate planning is a whole lot more complicated than that now.
The biggest problem with wills is that they must pass through a convoluted process called “probate”. This is where the courts analyze your will and decide whether or not to follow your wishes. This presents some major problems:
- It can take a lot of time. The probate process can go on for months. 3 to 6 months on average. That’s a lot of lost time for your loved ones.
- It can cost a lot of money. In order to successfully navigate your way through probate, you’re going to need proper legal representation. And that’s going to cost your estate or your loved ones whatever a lawyer charges. Think along the lines of something like $250 per hour! Multiply this by 3-6 months, and that’s a ton of expense!
- The will can be challenged. Despite your best and final wishes, your survivors can challenge your will. These could be your children, ex-wife, other family members, or even business partners who felt like they weren’t getting what they deserved.
- The will becomes public knowledge. This is perhaps one of the scariest reasons for me. Once a will passes through probate, it becomes public record. This means that if you leave one million dollars to your teenage children, guess what? Everyone knows! A very real and scary scenario is that every con-artist from miles around will be looking for a way to become romantic with your kids as they come f age; just so that they can get a piece of that inheritance. It’s disgraceful, but it happens.
- Little protection for minors. Another thing you may not be thinking about is that if you have minor children, a will really doesn’t do much to protect their inheritance until they’re at an age where they are responsible enough to know what to do with it. Could you imagine your 13 year old child inheriting your entire life savings? Even at 18, this could be bad news. I don’t care how responsible they are. It’s highly likely that some bad financial decisions will be made.
So if a will doesn’t help us in these areas, then what does? Enter a “trust”.
Why We Choose to Create a Trust Instead
A trust (or more specifically a revocable living trust) is kind of like a “super will”. It’s a legal entity that you create which completely bypasses the probate process.
In the event that you and your spouse were to pass, the assets in the trust pass on to the beneficiaries according to the instructions of the trust. This is much different from a will because there is minimal court intervention. You get to skip all the headache and expense of probate.
The trust is private, and therefore no one except your lawyer, successor trustee, and beneficiaries know what it contains or what the final wishes are. For this reason, a trust is also much more difficult to challenge.
Perhaps for us, the benefits to your minor children add the greatest amount of value. With the trust, you can leave instructions for how the money can and should be distributed. For example, you could decide to distribute 1/3 of the money for when they go to college, 1/3 when they turn age 25 (perhaps when they may want to get married or buy a house), and the rest when they turn 30 (maybe when they might start having children).
Keep in mind this applies to more than just your money. Your home is something you will want to pass down as well. A trust on property will take effect as soon as it is created. This can be beneficial for your children when they are old enough to inherit your home and build their own family.
Do You Give Up Your Assets?
No, not with a revocable trust. Your assets are all yours, and you can revoke or amend the trust at any time.
(There is another family of trusts called “irrevocable trusts” where you do lose access to any assets you put into them. But these are used more to help protect against Medicaid “spend-down” – a whole other topic that I will surely write a post about.)
Does A Trust Cost More?
Yes. From calling around 7 different lawyers in our area, the average price to create a trust was $1,000 to $1,500. Compared to a simple will at $300, that’s quite a bit more expensive.
BUT, again, compare that $1,500 trust to the price of 3-6 months of probate at $250/hour. Now which one looks like a deal?
Estate Planning > Retirement Planning
So there you have it. If you thought retirement planning was the last leg of financial planning that you’d ever have to deal with, as it turns out, it’s not. There’s a whole other level of estate planning.
However, like retirement planning, if you educate yourself on the basics and take action, it’s not too tough. You can save your loved ones a ton of trouble and make sure the assets you’ve spent your entire life acquiring get to where you wish they would go. As a responsible spouse or parent, this is just something you have to do.
Readers – How many of you have a trust or will? Why did you decide to go with one or the other? What advantages and disadvantages do you see to either?
Featured image courtesy of Flickr