Many people put off making an estate plan, for a variety of reasons. Sometimes it is discomfort with confronting mortality; sometimes it is just that they are too busy with the press of daily obligations. But often, it is because they have concerns about their estate and are unsure that they will be able to achieve their estate planning goals when they leave their inheritance.
The good news is that you don’t need to know exactly how to achieve those goals, or even have those goals firmly articulated. The first step to making an effective estate plan is to sit down with an estate planning attorney to discuss your situation. In the process of that conversation, you and your attorney will identify your needs and explore your options for meeting them.
We often find that when our clients learn about the types of estate planning tools available to them, they feel much more comfortable moving forward with making a plan. Here is some information about different ways to leave an inheritance.
Wills and trusts are the basic building blocks of most estate plans. People tend to be more familiar with wills, as they are more common, though trusts are steadily increasing in popularity (for reasons we will discuss below). Wills and trusts are the most common ways to leave an inheritance, but they function differently, so we will discuss them separately.
A will, also known as a “last will and testament,” is a document that provides for the distribution of the property of the person making it (the testator) after their death. A will can also name someone to be appointed as guardian of the testator’s minor children, if necessary, as well as someone to manage estate business (the executor or personal representative).
Everyone should have a will. But a will is not always sufficient for all estate planning goals. A will typically distributes assets to named beneficiaries outright. If a beneficiary is a minor, a conservator will usually have to be appointed to receive and manage the minor’s share of the inheritance until they reach adulthood. Even if a beneficiary is a legal adult, there are obvious risks to an eighteen-year-old receiving their entire inheritance at once.
There are various other reasons you might not want your intended beneficiaries to have unfettered access to their entire inheritance: creditor problems, the potential to lose part of the inheritance in divorce, money management or substance abuse issues. For these and other reasons, many people need a trust as well.
A trust is a legal relationship created by the trust document. The creator of the trust (grantor) places property in the trust to be managed by the trustee for the benefit of the beneficiaries. In some living trusts, the grantor, trustee, and beneficiary are all the same person (e.g. you or you and your spouse). After their death, a successor trustee takes over managing the trust for the remainder beneficiaries, usually a spouse, children, or grandchildren.
Unlike property left in a will, assets in a trust do not need to go through probate. There are many different types of trusts to achieve different goals: tax planning; creating incentives for certain actions, like completing college; protecting and providing for loved ones with special needs; protecting assets from nursing home costs or creditors; even providing for the care of a beloved pet.
If you are concerned about how your beneficiaries might handle assets left to them, you might create a trust in which the trustee has sole discretion over whether and when to make distributions, what for, and how much. So long as the trustee wasn’t also a beneficiary, such a trust could provide asset protection; because the beneficiaries have no right to demand distributions, trust assets and income are beyond their control and cannot be reached by creditors.
Alternatively, you could create a trust for the “health, education, maintenance, and support” of beneficiaries. These so-called HEMS trusts also give the trustee a fair amount of discretion regarding trust distributions, protecting your loved ones’ assets while meeting their needs.
You can also leave assets to loved ones through other means, such as making a beneficiary designation on a financial account or having joint ownership of real estate with your intended beneficiary. Some of these methods have the simplicity of not requiring an attorney’s help but can also have unintended consequences. Considering what could be at risk, it makes sense to discuss your goals with an estate planning attorney who can help you assess the advantages and disadvantages of those options.
The bottom line is that you shouldn’t put off making an estate plan because you don’t know how to leave assets to your loved ones. It’s your attorney’s job to help you not only clarify your needs but also determine the best way to achieve them while avoiding costly mistakes.
If you have been thinking about making a will or creating a trust in Michigan, or wondering about the best way to leave an inheritance to your loved ones, we invite you to contact our law office. We will sit down with you and come up with a plan customized to meet your needs.