A Beginner’s Guide to Wills, Trusts, and Key Documents for Securing Your Future
Estate planning has been a cornerstone of human civilization for over 2,000 years, tracing its roots back to the Code of Hammurabi in 1750 BC, which outlined property division "after one has gone to his fate." The oldest known "Will" was found in Egypt, dating back to 1797 BC. Over time, the concept of Trusts emerged in the 14th century and were initially used by religious orders under the term "usufruct." These practices laid the foundation for modern estate planning—designed to reduce burdens on loved ones, fulfill your wishes and minimize taxes.
Today, a well-structured estate plan typically includes a Will, a Trust, and Powers of Attorney for both healthcare and property management. Let’s break these down:
What is a Will?
A Will is a legal document that addresses how your probate assets—those held solely in your name and without a named beneficiary—will be distributed after your death. The person named in your Will, the Executor, manages the process under Court supervision. A Will can also designate a Guardian for minor children. However, it only takes effect after your death and does not avoid the probate process.
What is a Trust?
A Trust allows you to hold assets outside of probate, offering greater flexibility in how assets are distributed. For example, you can set up a Trust to delay distributions until your children reach a certain age or achieve milestones, such as completing College.
There are three parties involved in a Trust:
- The Grantor (you) – the creator and funder of the Trust. There are several names for this role: Trustor, Donor, Settlor.
- The Beneficiary – you from the start, but upon your death, there would be someone else like a spouse, or children.
- The Trustee – the party responsible for implementation and management of the Trust in compliance with the law. This can be an individual or an institution, like First American Bank, which can serve as your Trustee.
Estate planning with Trusts can help minimize estate taxes, especially through a strategy called the ‘A/B’ plan. This allows both spouses to fully use their estate tax exemptions, potentially saving a significant amount in taxes. Essentially, it’s a way to maximize the amount you can pass on to your heirs without facing hefty taxes.
Each individual has an Estate Tax exemption of $13.99 million, but this exemption is set to expire on December 31, 2025. It is important to note that tax laws can change, and the exemption could be reduced in the future. Additionally, each spouse can leave an unlimited amount to the other through the “unlimited marital deduction”. Without proper planning, leaving everything to your spouse may save on taxes at the time but leaves the exemption unused. Think of the exemption as a “coupon” that allows you to offset the tax due on up to $13.99 million, or whatever Congress sets as the new amount.
By using the ‘A/B’ plan through a Trust, both spouse’s “coupon” is used to shield double the estate tax exemption amount. Upon the death of Spouse 1, the trust divides the property into two pots:
- The Marital Trust (A pot) – This holds the assets left after applying the exemption.
- The Family Trust (B pot) – This uses the remaining estate tax exemption, ensuring that both spouses’ exemptions are fully utilized. Upon Spouse 2’s death, both pots pass to the children, estate tax-free, potentially saving up to 40% in taxes.
Other key components of your estate plan should include durable Powers of Attorney for property and health care. These documents allow you to appoint someone to make decisions and take actions on your behalf if you become unavailable or incapacitated due to illness, dementia, or other conditions.
At First American Bank, we understand that estate planning can seem overwhelming, but it doesn’t have to be. Our team is here to walk you through every step, ensuring you create a plan that reflects your wishes and protects your legacy for generations to come.
