Parents and step parents carefully plan for their family’s future. This should include preparing for certain eventualities. When a parent dies, a minor child will be left with uncertain living arrangements and an adult child will be left to handle his or her parents’ affairs. Without proper guidance and preparation, the emotional blow of losing a trusted family member can be compounded with severe financial pressures. Parents who plan ahead will have something to leave to their children.
The Importance of Wills and Living Trusts
When a person dies, a judge will supervise the distribution of the decedent’s assets and payments of his or her debts in probate. When a person dies testate, or with a will, his or her estate is executed in accordance with his or her will. In the event that the person dies intestate, or without a will, the estate will be divided in accordance with a body of estate law. There are many personal injury video tutorials that can be watched to get an idea of what happens immediately after a loved one is fatally injured. Distributing assets in the absence of a will normally involves furnishing assets to heirs and spouses. In limited circumstances, the assets of a person who dies without relatives and intestate will escheat to the state.
Certain assets will produce income periodically beyond mere appreciation. Such assets include financial holdings like stock, which may result in the payment of dividends, and rental properties, which will result in rental income. These assets will be divided with the remainder of the decedent’s assets upon his or her death. The devisee or distributee, or person who is entitled to assets under the will or in probate, of these assets will then be entitled to the corresponding income streams.
There are several ways in which one may structure the distribution of his or her estate. Drafting a will is one of the most common techniques. A will is simply a legal document drafted by a person that specifies how his or her assets are to be distributed upon his or her death. A will is most effectively drafted with the assistance of an attorney, as there are limits to what a will may contain and many jurisdictions have specific statutory requirements which must be met before a will is to be given legal weight.
Another way to ensure that certain assets go to certain people is to co-own the asset with the future beneficiary while both parties are still alive. The ability of the executor to distribute a certain asset will be confined to the amount to which the decedent owned the asset. Transferring property while one is alive may result in tax liability incurred at present, but will avoid the inheritance tax and other taxes at a later date. If the property is undervalued at the moment due to a temporary crash, it may be worthwhile to transfer the property to the future beneficiary to reduce the taxation. However, those looking to avoid taxation should consider another method.
The third method to ensure that one’s assets are treated in accordance with one’s wishes is to create a living trust. A living trust is an agreement between the trustor, or person who owns the property at present, and the trustee to hold certain assets in trust for future distribution to other parties. To create a trust, the parties will draft a trust agreement which determines how the decedent’s property is to be distributed. The trustor will then transfer the property to the trustee, where it will be held in trust. There may be multiple trustors who contribute to a living trust and the trustees may be another person, a company, or the trustors themselves while they are alive.
Living trusts come in two forms: revocable and irrevocable. A revocable trust is a trust in which the trustor reserves the right to modify the trust or revoke it altogether. It allows for flexibility in the event that the trustor suddenly requires the assets for living expenses or no longer wishes for specific assets to go to specific people. Most attorneys and financial advisors favor revocable trusts for these reasons. An irrevocable trust is a trust that cannot be revoked by the trustor.
The main benefit to creating a trust is to avoid probate. Probate is a time consuming process which requires the services of an executor and a court. Beneficiaries will not receive any assets or funding until the executor of the estate has settled the estate’s debts to the satisfaction of the court. The executor of the estate will charge fees for his or her services, which can detract from the overall amount to be distributed. By creating a revocable trust, beneficiaries will avoid the delays and fees associated with probate.
Living trusts are not a solution for everyone, however. Inheritance taxes still apply to the value of assets in revocable living trusts. Additionally, the trustee will charge a maintenance fee for his or her services, which can slowly deplete the funds in the trust. Creating a trust that will withstand a legal challenge from a creditor or a jilted heir will also require the services of an attorney, which will further deplete the prospective trustor’s assets. Finally, assets not transferred to the trust must still go through probate.
Preparing for the worst should include obtaining life insurance. Life insurance will provide the beneficiary specified by the policyholder with benefits upon the policyholder’s death. These benefits can help the policyholder’s immediate family members maintain their standard of living even after the policyholder passes on. There are several different types of life insurance policies available to suit different needs.
How much life insurance one should carry is a matter of personal preference and subjective judgment. When a person dies, funeral costs alone can reach thousands of dollars. A modest life insurance policy will cover these losses. Life insurance policies may be taken out for any amount, ranging from just enough to cover funeral costs to millions of dollars. Generally, policyholders should ensure that their benefits cover several years of their income.
Carrying a life insurance policy has two primary benefits over simply saving money and including it as a part of one’s estate. First, life insurance proceeds are generally exempt from taxation. When a person dies, the value of his or her estate is taxed; life insurance payable to specific beneficiaries is not included when determining inheritance tax. Second, life insurance allows beneficiaries to avoid probate, which allows for quick and relatively hassle-free payments.
Social Security Benefits
Social Security benefits include a limited death benefit payable to unmarried children and spouses. This benefit is limited to $255, so it likely pales in comparison to benefits distributed by a life insurance policy and the value of one’s estate. To be eligible to receive this death benefit, the spouse or child must have been receiving benefits under the worker’s record or have been eligible to do so.
None of the aforementioned methods is a substitute for another. People who are concerned about the well-being of their children should have a will, life insurance, and certain assets in a trust. As one attorney’s personal injury video states, getting injured in an accident can cause all types of issues that you may have never thought of before. Setting one’s financial affairs in order will help ease the burden on one’s family in the event that a serious accident or sudden illness occurs. Those looking to create a living trust, a will, or any other document that is important to end of life decisions should consult with an experienced estate lawyer.