It’s never too soon to set up a plan for the future of your assets. According to New York state-based elder law attorney Greg Piede, “If someone is 18 years old and has a bike, they should at least have a power of attorney. But as far as asset protection planning – 60s is a good time to start thinking about it.”
For many, retirement provides a logical time to start planning for the financial future, including how to manage and distribute your assets. Legacy planning comes with many options, from a simple will to a host of increasingly complex trusts. Having so many choices can make finding the solution that’s right for you feel overwhelming.
Estate planning can feel daunting, especially as you enter what’s supposed to be a relaxing retirement. As Piede says, “It’s like going to the dentist. People don’t want to talk about the bad things that could happen in their life. But starting the conversation early will make it easier.”
This article will help clarify the differences between a will and the most common types of trusts.
Writing a will
A will communicates the distribution of assets after one’s passing. “Wills can be simple documents,” Piede says. “Before you even meet with an attorney, have a basic list of what you want to happen with your stuff, and a few people you trust.” Once you have a sense for what you want, a lawyer can help you put it in legal language.
There are a few important sections of a will beyond the disposition of assets, where you’ll outline beneficiaries and how to distribute possessions among them. The basic components of a will include:
- Your name and a declaration that this document is your own, and revokes all previously written wills
- Naming guardianship for any children who are still minors
- Selection of an executor (and backup executor) and assigning trustee powers to the people you’d like to manage your assets
You may also add a list of provisions for how assets should be distributed in the event of a beneficiary’s change in life circumstances. For instance, if a child is listed as a beneficiary, you might phrase your will in a way that will prevent their spouse from receiving their inheritance in the event of a divorce. Some wills also include a trust. For example, you could include a minor’s trust for children under the age of 18.
Outside of your will, naming beneficiaries on assets like IRAs and investment accounts is key. This will allow the accounts to transfer directly, without going through the will or through probate – the legal process of determining if a will is valid.
A trust is a legal arrangement where a grantor puts a trustee in charge of an estate. The trustee manages the estate, often while the grantor is still living, and is responsible for distributing assets to beneficiaries upon the grantor’s death.
Getting around a tedious or expensive public probate process is one reason many people consider setting up a trust. “Most people have had an experience with probate that isn’t positive,” Piede says. “It’s out of date, costly, lengthy, and it’s also largely public. It goes on file who the heirs are and how much they’ve received.” Additionally, the legal fees associated with probate are deducted from the available assets, and it can delay their distribution.
The National Consumer Law Center advises against forming a trust to avoid probate alone, though. That’s because in many states, estates with assets below a certain threshold can go through a less expensive process for verifying a will.
Piede says there are two elements that go into the choice to set up a trust or rely on a will alone. “Mathematically,” he says, “if a person has $500,000 or more, then a trust starts to make more sense. The cost to establish the trust is fixed, but the benefits go up the larger the estate. If you have $200,000 or less, a will is typically better. But there’s also a human aspect. Sometimes a client with a smaller estate has been through a probate and they just don’t want that for their kids.”
There are many kinds of trusts, but the most common are irrevocable and revocable trusts.
Revocable – or living trusts – are established while you’re still alive and allow you to continue to manage your assets as long as you’re mentally fit to do so. Piede refers to this type of trust as “a puppet,” which you can continue to manage by naming yourself and your spouse as trustees.
“A will has a lot of meaning after you die,” says Piede, “but it doesn’t really do anything for you while you’re alive.” With a living trust, you’ll maintain control over the assets, which can continue to be sold, traded and acquired within the trust. You’ll still need to identify beneficiaries who will receive assets upon the death of the trustees, and at that time the trust will also become irrevocable.
AARP cautions against using living trust kits found online. These are unlikely to meet your individual needs. If you’re thinking about setting up a trust, work closely with an attorney who will be able to craft a document that is best suited for your specific situation.
Unlike a revocable trust, an irrevocable trust cannot be changed by the owner once it’s put in place unless all beneficiaries agree. “The purpose of an irrevocable trust, from the attorney point of view,” Piede says, “is to protect assets from being taken by nursing homes, or to protect them from estate taxes.” There are a number of laws that govern this type of trust that vary by state, so working closely with an attorney to make sure you’ve met all the criteria is important.
While letting go of control of assets is certainly a drawback of this style of trust, there are advantages in certain circumstances. The benefits of an irrevocable trust include:
- Protection from taxes: Because the assets are no longer the grantor’s, the estate is shielded from some estate taxes.
- Avoiding probate: As noted above, probate can be an expensive process and may delay distributing assets to beneficiaries.
- Asset reduction: This isn’t just to avoid paying estate taxes. Some government programs have maximum income requirements for eligibility. Placing assets in an irrevocable trust may make it possible for a grantor to access services they couldn’t cover on their own, such as long-term care.
According to the American Council on Aging, the asset limit for an older adult applying for Medicaid long-term care is generally about $2,000, while higher valued assets such as a primary residence, wedding rings and a vehicle can be considered exempt. However, applicants frequently remain above the asset limit, and still can’t afford their cost of care. An irrevocable trust helps older adults protect their assets – such as a home – while allowing them to seek assistance for care.
If you need care immediately, Piede notes, setting up this kind of trust now won’t help protect your assets. Medicaid has a “look-back period” – a rule that says assets put in a trust within the last five years are still available to pay for care. However, if you’re in reasonably good health and don’t anticipate needing skilled nursing in the next five years, this type of trust can help you protect assets if that time comes.
The importance of estate planning
Whether a will or a trust is a better fit for your estate, there are multiple reasons to prepare a document that clearly outlines how you’d like to distribute your assets. One reason is to be sure your wishes will be carried out – whether that’s defining a guardian for children who are minors or giving a treasured heirloom to a family member you know will appreciate it.
If you pass without leaving a will or trust that clarifies your wishes, the distribution of assets will be dependent on the laws of your state, which may not be in-line with what you would have chosen yourself.
Additionally, without clear instructions, survivors are left to guess what you would have wanted. This can create a frustrating situation for those who are left to make decisions on your behalf. “If you don’t leave any documents,” says Piede, “you’re leaving a lot of family drama. It’s a combination of grief and greed and childhood dynamics that surface. Anything you can do to make things clear, helps.
From my point of view, one indicator of success is avoiding family conflict.”
In addition to award-winning senior living, Holiday offers helpful resources on many aspects of retirement. If you’re just getting started, schedule a tour at a Holiday near you. Our attentive employees will be happy to share information on local attorneys who specialize in working with older adults.