Wills, Trusts and Transfer on Death Provisions
None of us likes to contemplate our own demise, but good estate planning requires us to do so. Many people believe that while estate planning can sometimes be very expensive it will always be complicated. While it is true that complex estate situations can entail significant expense, understanding the basics of some of the available estate planning tools may remove a bit of the mystery.
The probate process involves the settling in court of the affairs of a deceased party, but many accounts and financial assets can pass to the heirs without being part of probate. For example, life insurance and annuity contracts allow for named beneficiaries to receive proceeds without passing through probate. Likewise, traditional IRA’s, Roth IRA’s and employer sponsored retirement plans such as 401k’s permit the naming of beneficiaries, so these accounts can avoid probate as well. Many states even allow taxable brokerage and bank accounts to have “transfer on death” provisions that cause these accounts to function just like IRA’s. With any of these accounts however, it is always essential to keep designated primary and secondary (contingent) beneficiaries current and up to date. In addition, it must be remembered that all of these accounts that pass via contract will override any estate plans made by wills and trusts.
Wills are commonly used to pass property of the deceased to the named heirs. Some of the advantages of a will are (1) It can identify the parties entitled to the deceased’s assets, (2) Can specify how and when the assets will be distributed, and (3) Can allow for a tax-efficient way to divide up assets. Another feature of a will is that it facilitates the naming of a guardian(s) for one’s minor children. Disadvantages of a will are that (1) Assets may be subject to creditors (2) The will must go through the probate process and (3) Many legal experts believe that wills are easier to contest in court. Likewise, probate is a public process which may be problematic for some people.
Trusts are also commonly used in estate planning and can be more flexible than simple wills. Trusts allow you to (1) Specify who gets the assets and how and when they will be distributed (2) Can provide better tax planning for large estates, (3) Can arrange for care for disabled beneficiaries and (4) avoid the probate process for those seeking privacy. However, trusts are generally more expensive to prepare than wills and may introduce complexity which might not be warranted.
Regardless of which tools you select to manage your estate, the most important thing is to simply develop a plan. Far too many Americans don’t do any estate planning. Besides allowing the state’s laws of intestacy to govern the disposition of the deceased person’s assets, this failure to plan usually creates a veritable “mess” for the survivors to untangle.
If you would like to learn more about these and other wise financial planning moves, please contact us through our Level 5 Financial LLC website or via phone at 719-323-1240. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.