If you are interested in creating an estate plan, there’s an important question that needs to be answered – what type of plan is best? Should you draft a last will and testament? Do you need to include a power of attorney? Or should you go all-in and create a comprehensive plan featuring a living trust? Or do you not even need an estate plan? This article will address the pros and cons of each strategy.
There is an array of estate planning tools that people can utilize to protect and pass on their assets. The multitude of estate planning strategies can be viewed as both a blessing and a curse. It is blessing since you can create a tailored estate plan that fits your specific needs. Though, it is somewhat of a curse since it can be intimidating and a bit overwhelming when you first get started. This article will try to demystify some of the most common strategies that many people use, including “beginners” in estate planning.
There is no law on the books that obligates you, or anyone, to draft a last will and testament. Quite the contrary. There are numerous statutes that essentially act as a quasi-estate plan since they dictate how your assets will be distributed when you pass on. This is known as “intestate succession.”
There are not many pros associated with this strategy (maybe the additional free time you get by neglecting your assets?), but it is, unfortunately, quite common for people to pass away without a formal estate plan in place. On the other hand, the cons associated with not having a will are numerous and can be quite severe.
One of the biggest cons is that you are basically empowering the government to manage your assets and those assets will be distributed strictly in accordance with applicable statutes. There is no care or consideration into the relationship you had with your immediate family, distant relatives, loved ones, etc.
A step up from not having any plan is simply taking the time to draft a last will and testament. There are issues with relying exclusively on a will (which will be discussed in a bit), but it is worth noting there are a number of benefits.
Some other benefits to having a will include:
- You have the power to select an executor (ideally someone you trust).
- You have the power to name a guardian for your children.
- You can create a testamentary trust in the will.
- You retain the ability to amend your will.
- You retain the ability to revoke your will.
Despite some of the benefits of a will, there are drawbacks and potential pitfalls. Here are a few:
- You run the risk of a loved one challenging the veracity of your will or a particular provision within your will.
- You may need to go through the time-consuming and costly probate process.
- A last will and testament is considered a public record and can be access by third parties.
|Pros of a Will
|Cons of a Will
|Empowered to manage your assets
|Risk that a family member challenges the vercity or validity of your will
|Empowered to determine who recieves your assets
|Having to endure the probate process
|You can amend or revoke your will
|Your will is a public record
Another strategy to consider is having both a last will and testament and a power of attorney. A power of attorney is a legal document where one person (i.e. a principal) appoints an agent and empowers that agent to act on his behalf.
A benefit of incorporating a power of attorney into your estate plan is that it can be an effective tool for handling your business affairs and important financial matters (e.g., paying your mortgage, credit cards, etc.), especially if you become incapacitated for a period of time. Nevertheless, adding a power of attorney does have certain drawbacks. One of the biggest drawbacks is the risk associated with empowering an unscrupulous or neglectful individual with power of attorney. Misplaced trust in the wrong person runs the risk of potential financial ruin or mismanagement.
The next strategy is arguably one of the best – taking the time to create a comprehensive estate plan featuring a revocable living trust. When you establish a revocable living trust, you retain the power to distribute your assets while you are still alive. When you pass away, a “successor trustee” will then become empowered to distribute the assets in the trust, in accordance with your instructions. Some of the other benefits associated with a revocable living trust include:
- Avoid the costly and inefficient probate process.
- Provides certain legal protections in the event you become incapacitated.
- A living trust can assist a trustee, or trustees, in carrying out your wishes and desires.
Despite the many benefits of a living trust, there are some cons, including:
- Not many tax benefits. If you transfer assets into a revocable trust, it generally will not save or reduce your income taxes or potential estate taxes.
- Not much in terms of overall asset protection. When you transfer assets to an irrevocable trust, they are typically shielded from creditors. This is not the case when you set up a revocable living trust since those assets remain in your name.
- Risk of probate. Any assets not titled into your revocable living trust will go through probate.
- Administrative burden. When you create a revocable living trust, you will have to invest the time to re-title your assets so they transfer from individual ownership to being owned by the living trust.