Part of my job as a lawyer is answering questions – in fact, a lot of my job is answering questions. As a result, some questions crop up rather frequently. Here are a few frequently asked questions from estate planning clients that you may have wondered about yourself.
What’s the difference between a will and trust? Do I need one or both?
A will tells everyone what happens to your earthly goods when you die and who you want to be in charge of getting them to where you want them to go. A will does not avoid probate but makes the probate process a bit easier.
A trust is considered a legal entity, similar to a corporation. Anything held in trust is not counted as part of your estate, so trust assets can avoid the whole probate process. A trust is also a good vehicle for holding assets over time – for example if you have young children who aren’t ready to inherit just yet.
Everyone could benefit from having a will. A trust is useful to anyone looking to avoid probate or hold assets over time. However, a trust does not replace a will, so while you may have a will and no trust, you should not have a trust with no will.
What is probate?
Probate is the process where the government oversees the administration of your estate. The idea is to ensure that everything goes where you would probably want it to go and no one runs off with your money to the detriment of your loved ones. While the intention is good, in California, the probate process is slow and expensive, so most people prefer to avoid it if possible. It is required if the estate (everything owned in your name) is above about $180,000 (as of the time this article was posted; this amount is subject to change over time). As noted above, assets held in trust are not counted as part of the estate, so holding your assets in trust is an excellent method of avoiding probate.
Who needs an estate plan?
My knee-jerk response is everyone, but then I’m biased. A more nuanced answer is anyone who wants to control what happens to their estate, make sure their loved ones are taken care of, and make things easier for those they’ve left behind. (And yes, I have met people who have no loved ones and don’t care what happens after they’re gone, so they do exist.) This can be accomplished with a will, but I would also recommend a trust for anyone with a net worth of more than $180,000 (to avoid probate), and/or who has young children that can’t inherit right away.
What’s in an estate plan?
I’ve already covered the will and trust above. The advance health care directive and the power of attorney are other documents that would typically be included. The advance health care directive tells your doctors who can make decisions about your care if you can’t do so yourself, and the power of attorney names an agent who can manage your finances and pay your bills if you are unable to do these things yourself.
When should I update my estate plan?
People often want a specific timeline for updating, but in most cases, it’s more about a change in circumstances. There are typically three reasons why it might be a good idea to update:
- Changes in tax law. Tax laws are constantly in flux, so it’s a good idea to check every so often to see if there’s a change in the Tax Code that would make updating a good idea. For example, in the last decade, the estate tax exemption has gone up significantly, so many people have updated to get rid of clunky trusts that require the formation of multiple sub-trusts to reduce their estate tax liability.
- Changes in personal circumstances. Anyone who recently married, divorced, had a child, or bought or sold a house should probably update their estate plan to reflect these changes.
- Changes in preferences. Sometimes nothing has changed but your feelings, and that’s perfectly fine. Your best buddy today may be a distant memory in ten years, or a child you’ve been estranged from may come back and reconnect. It’s a good idea to change things so that people who are no longer in your life aren’t a crucial part of your plan and people who have come into your life have a place at the table.
Is there an answer that you’re looking for that is not among the frequently asked questions in estate planning? Then please feel free to email me at firstname.lastname@example.org.