Last week, I talked about a will and provided 7 fundamental reasons why it is important to have one. In this post, you will learn about different types of wills that you need to be aware of before you draft your own one.
As you already know, estate planning can be overwhelming. With this serious of posts on most important estate documents, my goal is to educate you more on this important topic and nudge you to get to work on your estate documents sooner rather the later. The primary reason, in my opinion, why so many people keep putting off dealing with estate planning isn’t because they are ignorant. It is because no one has ever pointed out the potential risks and consequences of this inaction.
This lack of awareness can lead to an irreversible chain of events that can easily put you in financial jeopardy, affecting not only a comfortable retirement, but also the overall financial security of you and your loved ones. And since risk management is the at the core of my profession as a fiduciary financial advisor, it is through estate planning that you can drastically reduce these unnecessary legal and financial risks and protect your future.
Types of Wills
Before you create a will, you need to know your options. There are 7 different types of wills, of which four types are considered to be the primary ones. These include:
Number 1: Simple Wills. In a simple will you can specify who gets your assets and how they will be distributed. In addition, you also can assign legal guardians for your minor children and a personal representative who will be carrying out your wishes. Simple wills establish the foundation of your estate plan. It would not hurt to talk to an estate planning attorney first before drafting it. However, if your situation is simple (no pun intended), you can even draft it for free using software or online will forms.
Number 2: Living Wills. Unlike a simple will, a living will has nothing to do with distribution of your assets. In fact, its purpose is quite the opposite – to express your wishes about your health treatment when you can’t speak for yourself and become incapacitated. For example, you can leave instruction on which medical procedures you are willing to undergo and which are not when you become terminally ill. Depending on a state you live in, a living will can be a part of an advance health care directive that combines a living will, a health care proxy, a durable power of attorney, and an anatomical gift.
A living will has nothing to do with distribution of your assets
Number 3: Joint Wills. A joint will is a one will that is signed by two people. A good example is a husband and wife. The joint will stipulates that when one spouse dies the surviving spouse gets the whole estate; and when the surviving spouse dies the remaining assets go to someone who they both named. The problem with a joint will is that there is no flexibility at all and it can’t be changed even after the death of the spouse. If you and your spouse are looking to ensure that the remaining assets after a surviving spouse dies go exclusively to the person you both named, such as your child, then a joint will is a good choice. However, if you need some flexibility and may need to alter a will in the future, a reciprocal will, is a better choice as it gives the surviving spouse this flexibility and allows to make changes to the will and even name a different beneficiary.
A joint will can’t be changed
Number 4: Testamentary Trust Wills. A testamentary trust will has a provision that creates a trust inside a will and places all or portion of your estate into the trust upon your death. The trust itself is only created after your death, not during one’s life like with a living trust. A trustee of the trust will be then responsible for the distribution of your assets to your beneficiaries.
The testamentary trust will is commonly used when you need to make sure that your assets are used wisely and not wasted, as in a case with minor children. For example, you can specify the exact age or a certain condition before your child can get an inheritance. Or, in case of a financially irresponsible individual, you can create a spendthrift trust inside a testamentary trust will and allow the trustee to distribute assets gradually. One important thing to mention regarding the testamentary trust will is that since there is no trust created before a death, the will must go through the probate process.
The testamentary will must go through the probate process.
Most likely you won’t go wrong with any of these wills. However, there are three other types of wills that you may need to be aware of.
Number 5: Holographic Wills. A holographic will is a will that is written and signed by hand without witnesses. These wills are usually used in life-threating situations, such as on a battlefield or burning building, and where no witnesses are available. The validity of a holographic will isn’t recognized by each state and requirements may also vary significantly from state to state. So, if you had to draft one, make sure to check if your state recognizes it. But in any case, make sure to create a will either with the help of your attorney or using technology.
Number 6: Pour-Over Wills. If you have already established a revocable living trust and accumulated some assets after the trust had been established, but haven’t put these assets into the trust yet, a pour-over will allows to put these assets into the trust upon the death. For example, let’s say that one spouse bought a boat and titled it under his or her name. Should this spouse die, the boat will “pour over” into the trust where it will be distributed within trust terms and settlor wishes.
Number 7: Oral Wills. An oral will, as you have probably guessed, is spoken out and not written down. This will is usually created when there is a chance that a testator (a person who speaks out the will) may die soon and time is of essence. Oral wills can be easily challenged by courts and some states don’t even recognize them at all. Therefore, before you say one out loud make sure to know the legal requirements of your state.
Which Type of Will is Right?
There is no one-size-fits-all solution here as the right choice of a will type depends heavily on your unique circumstances, which assets your own, and where you own them. In my opinion, you need to start with something basic first and then makes changes as your life evolves. If you are creating a will for the very the first time and don’t have that many assets, I’d say that you can’t go wrong with a simple will. The simple will covers the distribution of your assets as well as assigns legal guardians for your minor children. If you need more control over the distribution process of your assets in order to be confident that your wishes will be carried out, a testamentary trust will most likely will be a better choice.
Happily, you have choices and with so many options you certainly can find the type of a will that is best for you and your family. And if you are still not sure which type is right, just talk to your financial advisor or an estate planning attorney – their help can be invaluable in such situations.