One of the most common questions regarding setting up an estate plan is, “do I need a will or a trust?” Many have heard about their friends setting up Living Trusts and wonder if that is what they need.

According to Wikipedia, “a will or testament is a legal declaration by which a person, the testator, names one or more persons to manage his estate and provides for the transfer of his property at death.” In other words, a document that says where you want all your stuff to go when you die. Kind of morbid, but as time continues to fly by, we are all speeding toward the time when we will meet our maker. Thus, as a gentleman I know said at a recent conference, “we should be brave enough to face our own mortality, and wise enough to do something about it.”

With a will you get the opportunity to say where you want all your stuff to go. If you do not, each state has a formula to decide for you. Wouldn’t you rather decide? Also, if you have minor children, you can decide who you want to care for them. Obviously, this is a very important decision that may affect your child’s life forever. You should consider things like their appointed guardian’s proximity, child rearing philosophy, religious views and their financial ability to provide.

Let’s clear up a few common misconceptions about wills.

1. An executor of a will is not a power of attorney. An executor has no power until after you die. They cannot handle financial affairs for you now. That is why you may need a durable power of attorney.
2. A will does not avoid probate. It is generally a one-way ticket to probate. Probate is not necessarily bad. It is a court-supervised process to get your assets where you want them to go as stated in your will.
3. A will does not control where everything goes. Accounts like IRAs, 401(k)s, life insurance, annuities or any other type of retirement accounts are generally controlled by beneficiary designations. If you are doing your will, this would be a good time to make sure all beneficiary designations are up to date. If they are not, your money could end up somewhere you did not intend (Google the horror story “the pension pickle”).

So, how about a trust? A trust is generally a “will replacement.” It has a plan of distribution just like a will. One of the biggest reasons a trust may be used in place of a traditional will is probate avoidance. There are many other reasons for trusts, but this seems to be the most common. The public has objected over the years to the cost of probate and how long it takes to get done. Attorneys are usually paid a higher level of compensation for probate assets as opposed to nonprobate assets. As a result, many have gone to setting up a trust to bypass the process. This happens by retitling certain assets now, so that later there is no probate required. A trust is usually much more expensive than a will, but has the potential to save a substantial amount of money when the estate is settled.

Let us also address some common misconceptions about trusts.

They are all the same: No, they are not. There are many different kinds of trusts for many different purposes. You could almost compare it to buying a car. Some have the basic equipment, while others have more features and benefits.

If you set up a trust, you automatically avoid probate. No, no, no. You have to “fund” the trust to avoid probate. This is the biggest mistake people make when it comes to a living trust: not getting assets titled in the trust.

If I have a trust, I don’t need a will. There is a special will that goes with the trust called the “pour over” will. This gets things in the trust so the plan of distribution of the trust controls (you still may have a probate, though).

A will or a trust? The best way to answer this question is to visit a qualified estate planner and figure out what is best for you. Many times it depends on the amount and type of assets you own. As I heard a local respected estate planning attorney say early in my career, “always a will, sometimes a trust.” As always, when you think retirement, think The Retirement Guys.

For more information about The Retirement Guys, tune in at 1 p.m. every Saturday on 1370 WSPD-AM or visit www.retirementguysradio.com. Securities and Investment Advisory Services are offered through NEXT Financial Group Inc., member FINRA/SIPC. NEXT Financial Group Inc. does not provide tax or legal advice. The Retirement Guys are not an affiliate of NEXT Financial Group. The office is at 1700 Woodlands Drive, Suite 100, Maumee OH, 43537. (419) 842-0550.

Tags: Mark Clair, Nolan Baker, probate, The Retirement Guys, trusts, wills

This entry was posted on Friday, March 2nd, 2012 at 11:45 am and is filed under Retirement Guys, Toledo Business Link.
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