It’s the question that no one wants to be faced with: What will happen with my assets when I pass away? How will they be distributed? This is where estate planning comes in. Estate planning is a collection of preparation tasks that serve to manage an individual’s asset base in the event of their incapacitation or death.[1] Two important tools to manage this are wills and trusts.
A will is the one of the most common forms of estate planning. At its most basic form, a will is a legal document that describes how you want your wealth to be distributed in the event of your passing.[2] Unless you have a special circumstance as listed below, wills should fit the interests of most people. But there are several reasons why people chose to set up a trust instead of writing a will. There is a lack of confidentiality in writing a will. Wills are public record and anyone can access them since they will be passed through probate court. The process of probate can be a long process that racks up significant legal fees. Also, the laws of several countries define specific rights of heirs. Unless the deceased has a compelling interest on which heirs should not receive benefits, then perhaps a will would be more fitting than a trust. A final problem with wills is that the benefits can be taxed according to law. This is especially a problem for wealthier individuals who want to preserve as much of their wealth as possible.
A trust is a fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries. The most common reason of trusts is to avoid the probate process completely. Another very common reason is a trust for charitable giving. Trusts are legally in the hands of a trusted individual and are able to sidestep the probate process completely. Trusts also offer the luxury of confidentiality so that outsiders cannot see who receives benefits. Another added benefit of trust is that the settlor can dictate how he wants his assets distributed more creatively. The settlor can specifically define when the beneficiaries receive benefits, including spreading the beneficiary distributions over several years or even decades rather than making beneficiaries overnight millionaires at age 18 when beneficiaries might not be financially mature to handle such big sums of money. Wills do not have this benefit since they are subject to public law. Yet there are certain costs in setting up a trust. So trusts are usually for people of higher net worth, people with charitable giving motives or people who want their assets distributed in a specific way.
Properly executed estate planning can go a very long way and facilitates smooth asset transition to the intended beneficiaries. On the other hand, improperly planned estate planning can be disastrous. A case in point is Philip Seymour Hoffman, whose estate lost an estimated $15 million to estate taxes after his death.[3] Probate courts are not cheap either and compound the above problem even further, as legal battles have cost fortunes and divided families. Remember, the goal of estate planning is to transfer wealth with as little costs and delays as possible to intended beneficiaries and intended charitable causes. Set some time aside to do proper estate planning with a professional. This can save a lot of stress and money in the event of an untimely death.
Read More:
http://www.investopedia.com/terms/e/estateplanning.asp
http://www.forbes.com/sites/russalanprince/2013/11/04/what-is-estate-planning/
http://wills.about.com/od/preparingtodraftaplan/a/top5reasons.htm
Sources:
[1] http://www.investopedia.com/terms/e/estateplanning.asp
[2] http://www.investopedia.com/terms/e/estateplanning.asp
[3] http://www.forbes.com/sites/deborahljacobs/2014/02/20/philip-seymour-hoffmans-will-raises-legal-problems/