[This article was written by Julia Rodgers, CEO and co-founder of HelloPrenup, the premier platform for prenuptial agreements.]
What is a Will?
A Will is a legal document that declares what you would like to be done with your assets and belongings upon your death. Specifically, you can name beneficiaries to receive particular property. Beneficiaries could be your spouse, children, friends, or even charities. If you have minor children, a Will can also designate who will care for them in your absence. This helps to ensure a smooth, seamless transition in care with an individual you trust. When preparing your Will, an executor is named who will ensure that your final wishes are honored.
If you don’t have a Will, your assets and belongings will be distributed according to state law. Your beneficiaries will also be designated by law. Generally, your legal beneficiaries will be your spouse, children, parents, or other close family members.
What is a Trust?
Trusts are fiduciary agreements that allow property and assets to be held for the benefit of another – or yourself. Property placed in a Trust will pass directly to the named beneficiaries upon death. Real estate, stocks and bonds, jewelry, vehicles, savings accounts, retirement accounts, life insurance policies, business interests, and more may be placed into a Trust. A trustee is named to manage the trust.
Trusts offer many benefits and, despite popular belief, aren’t just for the rich and famous. Trusts avoid probate proceedings which means that beneficiaries receive the property and assets sooner and with fewer headaches. Additionally, Trusts can reduce or eliminate estate/gift taxes. For families with young children or children with special needs, Trusts can facilitate long-term financial planning and care.
There are several types of Trusts. The big category includes Revocable and Irrevocable Trusts. Revocable Trusts can be changed or modified over time, while Irrevocable Trusts, as the name suggests, cannot be changed. Additionally, the creator of a Revocable Trust, also known as the grantor or trustor, can typically retain control over the Trust and the assets they contain during their lifetime.
In contrast, Irrevocable Trusts cannot be managed or controlled by the creator. The Trust must be managed by a third party. Once the terms are set, they are set in stone. This type of Trust can be beneficial if you are vulnerable to lawsuits, for example. Assets in an Irrevocable Trust are protected from legal judgments, creditors, and liens.
It’s important to note that when you place assets or property into a Trust, you are transferring ownership to the Trust. This provides protection for your property and makes it more difficult, or in the case of Irrevocable Trusts, impossible to gain access to the contents of the Trust. This can provide peace of mind, especially if you are setting certain items aside for children or grandchildren.
The difference between Wills and Trusts
Both Wills and Trusts allow you to designate the beneficiaries of your property and assets upon your passing. While there is definitely overlap in their abilities, they also each have a few advantages over the other. The biggest difference between these two legal arrangements is that a Will doesn’t go into effect until after the creator dies. In contrast, Trusts are effective as soon as they are formed.
Wills are considered simpler legal arrangements and they come with the big drawback of needing to go through probate before assets are distributed. However, they also serve the very important purpose of naming guardians for your children and declaring your final wishes. Trusts can be more nuanced and avoid the headache of probate and estate taxes.
Prenups in estate planning
One issue that often comes up in estate planning is how to provide for children from a prior marriage after death. Generally, spouses have a legal right to inherit a portion of their deceased spouse’s estate. These rights are governed by state law which makes it difficult to disinherit a spouse.
For example, if a spouse’s Will states that all of their property will go to their children, leaving nothing for the surviving spouse, the court will likely step in and override the Will to provide for the surviving spouse. This right is commonly referred to as an “elective share”.
Elective share rights can be waived, however. But this is something that your Will or Trust cannot do. Why? These are unilateral legal arrangements. In other words, created by you, without requiring the agreement of any other party. A prenup, on the other hand, is a negotiated agreement between two parties prior to marriage. So, while prenups are generally intended to handle matters in the event of divorce, they can also play a crucial role in this situation. In a prenup, you and/or your spouse can waive rights to elective shares. This allows a spouse to then legally leave all of their property to their children.
How Wills, Trusts, & prenups can create a comprehensive estate plan
If you pass without a Will or Trust, the distribution of your assets will be up to state law. The same thing goes for prenups and divorce. If you divorce without a prenup, the division and distribution of your property will similarly be determined by state law.
So, to fully protect all of your property and assets, as well as your beneficiaries, having some form of all three (Wills, Trusts, and prenups) may be the safest bet. Let’s explore how these legal arrangements work together to create a comprehensive estate plan.
Tim is a widowed father of three. Several years after the death of his wife, Tim met Wendy and they got married. Wendy was a very successful entrepreneur with significant wealth. As Tim’s children had already lost a parent, he wanted to ensure that if something happened to him, the children were well taken care of. Luckily, Wendy was on the same page. Prior to getting married, Tim and Wendy entered into a prenuptial agreement in which Wendy agreed that all of Tim’s premarital property and any property he acquired independently during the marriage is his separate property. Additionally, she waived her right to receive any of Tim’s separately owned property in the event of his death. This would allow all of Tim’s property to pass to his children and avoid elective share laws.
Next, Tim created a Trust in which he placed all the property that he wanted the children to receive and named them as beneficiaries. That way, should he pass, all the property would pass directly to the children. Finally, Tim created a Will in which he designated the children’s guardian in the event of his death. Between the prenup, Will, and Trust, Tim ensured that his children were provided for in a comprehensive and efficient manner.
Let’s take a look at another example of how these three legal arrangements can work together. Amy has been divorced twice and has two children from her second marriage. After meeting Stephen, Amy decided to give marriage another shot. However, after going through two divorces, and having children to protect, Amy wanted to make sure that her hard-earned assets were not up for grabs should she wind up in another divorce. Before the wedding, she created an Irrevocable Trust with her children named as the beneficiaries. In the Trust, she placed several special items that she wanted to be totally unreachable by any future ex-husbands. Amy and Stephen also entered into a prenuptial agreement in which they each agreed to waive their right to alimony in the future, that way they could make a clean break should they divorce. They also agreed that all of Amy’s premarital property would be separate/non-marital.
Several years down the road, Amy was convinced that Stephen was the real deal. Being older than Stephen, Amy realized it was likely that she would pass before him, and she wanted to ensure that he was taken care of. So, Amy updated her Will to ensure that Stephen received the home they were currently living in which was owned by Amy (in addition to other property and assets not designated for the children). By using all three forms of estate planning, Amy was able to provide peace of mind that she was protecting herself, as well as providing for her loved ones.
By using various forms of estate planning, you are better able to meet your individual needs while also providing more comprehensive protection for your property and your beneficiaries. If you haven’t already, consider incorporating Wills, Trusts, and prenups into your estate plan.
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