Revocable Living Trusts and Wills
Which is right for you?
There are many legal strategies involved in estate planning, including wills, revocable living trusts, irrevocable trusts, durable powers of attorney, and health care documents. New clients often say that they do not have an estate plan. However, most people are surprised to learn that they actually do have some sort of a plan already. If they have not created an estate plan of their own, their estate will be distributed after death according to the default estate plan in the state laws of Maryland or Washington, D.C. The residence of the decedent determines what state’s law apply. To control who inherits your wealth and who distributes that wealth, you must draft your own estate planning documents.
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Your Last Will and Testament
Your last will and testament is just one part of a comprehensive estate plan. If a person dies without a Will, they are said to have died “intestate” and state laws will determine how, and to whom, the person’s assets will be distributed. Some things you should know about wills:
- A Will has no legal authority until after death. So, a will does not help manage a person’s affairs when they are incapacitated, whether by illness or injury. This is where a Revocable Living Trust may be helpful.
- A Will is a good place to nominate the guardians (or back-up parents) of your minor children if they are orphaned. All parents of minor children should document their choice of guardians. If you leave this to chance, you could be setting up a family battle royal, and your children could end up with the wrong guardians.
- A Will does not help an estate avoid probate, the required court proceeding, necessary to distribute an estate. A Will is the legal document submitted to the probate court, so it is basically an “admission ticket” to probate. If there is any advice to take away from estate planning it is that avoiding probate court is a goal that can be accomplished with a trust, but not a Will.
Revocable Living Trusts: Trusts Explained
Irrevocable Trusts, Testamentary Trusts, Special Needs Trusts, etc.
Trusts come in many “flavors,” they can be simple or complex, and serve a variety of legal, personal, investment or tax planning purposes. At the most basic level, a trust is a legal entity with at least three parties involved: the trust-maker, the trustee (trust manager), and the trust beneficiary.
Oftentimes, all three parties are represented by one person or a married couple. In the case of a revocable living trust, for example, a person may create a trust (the trust-maker) and name themselves the current trustees (trust managers) who manage the trust assets for their own benefit (trust beneficiary).
Depending on the situation, there may be many advantages to establishing a trust, including avoiding probate court. In most cases, assets owned in a revocable living trust will pass to the trust beneficiaries (or heirs) immediately upon the death of the trust-maker(s) with no probate required.
Certain trusts also may result in tax advantages both for the trust-maker and the beneficiary. Also, trusts may be used to protect property from creditors, or simply to appoint someone else to manage and invest property for the trust-maker(s) and the beneficiaries of the trust. If well drafted, another advantage of trusts is their continuation after the trust-maker dies or becomes incapacitated. A trust can be a continuing legacy that benefits the family.
Powers of Attorney
A power of attorney is a legal document giving another person (the attorney-in-fact) the legal right (powers) to do certain things for you. What those powers are depends on the terms of the document. A power of attorney may be very broad or very limited and specific. All powers of attorney terminate upon the death of the maker, and may terminate when the maker (principal) becomes incapacitated (unable to make or communicate decisions). When the intent is to designate a back-up decision-maker in the event of incapacity, then a durable power of attorney should be used. Durable Powers of Attorney should be frequently updated because banks and other financial institutions may hesitate to honor a power of attorney that is more than a year old.
Health Care Documents (or Advance Directives)
An advance directive is a document that specifies the type of medical and personal care you would want should you lose the ability to make and communicate your own decisions. Anyone over the age of 18 may execute an advance directive, and this document is legally binding in Maryland and Washington, D.C. Your advance directive can specify who will make and communicate decisions for you, and it can set out the circumstances under which you would not like your life to be prolonged if, for example, you were in a coma with no reasonable chance of recovery.
A document that goes hand-in-hand with your advance directive is an authorization to your medical providers to allow specified individuals to access your medical records. Without this authorization, your doctor may refuse to communicate with your hand-picked decision maker.
Is a Revocable Living Trust right for me?
Living Trusts v. Wills
When it comes to estate planning the different options for trusts and wills may seem overwhelming and excessively nuanced. As any skilled estate attorney will tell you, the most significant step in the process is finding which document works best to protect your assets for you and your family. Revocable Living Trusts and Wills both specify instructions for who should inherit your property after you are gone.
Benefits of Revocable Trusts
Understanding the benefits of a revocable trust or living trust as compared to a standard Will can provide you and your family with the knowledge to shoose the best course for you. Some of the main benefits of choosing a revocable trust over a will include:
- Avoiding Probate: The probate process is court-supervised and it can be long and expensive. The creation of a living trust allows you to avoid this probate process because it removes the court from the process.
- Planning for Incapacity: In the event of a medical emergency or medical condition that may render an individual unable to make important life decisions, revocable trusts can include detailed instructions for a healthcare agent if necessary.
- Maintaining Privacy: A trust is not a document that is registered with the court to start the probate process, so your estate planning terms are more private, than with a Will.
Disadvantages of Revocable Trusts
- Trusts are complex: In comparison to wills, some consider trusts more complex to execute correctly. However this should not act as a deterrent, as Profit Law Firm is available to help you navigate these complexities.
- Tax Obligations: Just as living trusts can offer some advantages regarding taxes, living trusts may also not provide the exact desired benefits when it comes to tax planning.
- May not change with circumstances: Where some wills can automatically change along with certain life events like divorce or the birth of a child, living trusts may be lacking this flexibility. Yet, this disadvantage can be easily addressed through skilled estate drafting and the use of amendments to a trust.
Beyond this quick comparison of the two main foundations for estate planning, understanding the differences and subtleties of these two testamentary instruments is crucial to ensuring your estate plan is the best for you and your family. An estate planning attorney at Profit Law Firm can help you decide whether a trust or Will or mix of various estate planning documents is right for you and then execute these documents in a way that will make finishing the estate planning process as easy as possible.