Wills, Trusts and IRA Beneficiaries: How does it all work?

To form a will, build a trust, or establish beneficiaries is to face the reality that we all die. A thought that is welcome by few but we all must accept. American journalist, Chuck Palahnuik said it best, “We all die. The goal isn’t to live forever, the goal is to create something that will.” We have been talking about building a legacy and creating generational wealth that will last long beyond an individual’s lifetime. It first begins with aligning our estate planning with our legacy to prepare our loved ones when we are gone.

Estate planning is not reserved for the wealthy, it is for everyone regardless of socioeconomic status.

How do wills work?

A will is a document that outlines your wishes for your family, and friends, and the distribution of your assets upon your death. You can outline who you want to receive certain assets and keep assets away from those you don’t want to receive assets. Wills are important because they can determine who should care for your children if you were to pass away. Without this disclosure, the courts will decide. It is important to note that a will gives your final requests to the probate court to ensure that your wishes are followed through upon.

There are many websites that advertise building your own will, however, at Wiser, we recommend utilizing a trust and estate planning attorney to draft your will. They can also serve to help you find a notary or witnesses for your signature on the document. Some states do not require a notary, but it is a good idea to pursue notarizing your will anyway. Wills are essentially your time to give a physical piece of yourself to those whom you love. Preparing a will gives the probate court the leverage it needs to complete your final requests. If you do not prepare a will, it often leaves the distribution of assets in the hands of judges or state officials which can lead to family dissension.

How do trusts work?

A trust gives another party, the trustee, the right to hold title to property or assets for the benefit of a third party. Making it similar to a will, but it has the benefit of avoiding probate court and potentially alleviating estate taxes for those with over 24.12 million in assets (per couple). The trust can also be acted upon while a person is living or after death. Beyond that, it can protect assets from creditors while giving specified terms for the beneficiary of the inheritance. Assets that are in a trust benefit from the step-up in basis which could allow for tax savings for the beneficiaries should they choose to sell the property or asset. Trusts are more expensive to establish compared to a will. Trusts can cost $1,000 to $5,000 depending on the type of trust. This is why many opt for a will instead.

There are different kinds of trusts that provide different benefits. A living trust is for while the trustor is alive to allow the beneficiary to use and benefit from the trust during the trustor’s lifetime. These will then be transferred upon death. A revocable and irrevocable trust are two main categories of trust. Revocable means it can be changed or dissolved by the trustor during their lifetime, whereas an irrevocable trust cannot be adjusted once the trust has been formed. An irrevocable trust can shelter assets and income so that someone can qualify for Medicaid and can shelter one’s assets from lawsuits. Each carries its own benefits and burdens, ultimately it is your decision to decide which is the best for you.

How do beneficiaries work?

A beneficiary is who you designate to receive assets after you pass away. For investment accounts, it is as simple as filling out a document. It is important to reflect on who you wish to receive your assets. Often it is a spouse and then your children, if not it normally goes to a brother or sister in the family. A beneficiary does not have to be a family member though, it can be anyone you deem as someone you want to receive a piece of your assets. Remove the social norms and think of who you want to receive the assets from or what organization you want to receive the assets from. It is your wish to be honored, no one else’s. Every account you have needs to have a designated beneficiary so that it does not stop in probate. Also, if you go through a divorce or if a beneficiary passes away be sure to update your documents to reflect that. Otherwise, it will go to the person designated on the account. A good practice is to review your beneficiaries every year at your annual review with your financial advisor.

What’s Next?

If you have no desire to create these documents or feel as though it really doesn’t matter. Let this serve as a reminder that this is the final act of love you give them after you pass. The grieving process is different for everyone and this will help your family know the best steps to honor you after your passing. It is best to be prepared for your family regardless of when that day comes.

Have more questions? Contact Us

Michaela Dowdy
Financial Planning Associate

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By Published On: July 27, 2022

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