Estate plans come in all sizes and shapes. One of the decisions in creating an estate plan is whether a trust should be part of your plan, as detailed in this recent article titled “Trust vs. Will: What They Share (And 6 Ways They are Different)” from Yahoo! Money. Both trusts and wills give control over how assets are distributed. However, there are differences.
A trust is a tool for asset protection during and after life, created by an estate planning attorney. When the trust is created, assets are transferred into the trust, which is a legal entity. If it’s a revocable trust, typically, you are the grantor, trustee, and beneficiary. There are other roles, like the successor trustee, the trustee if the primary is incapacitated, and the beneficiary who receives the assets. The trustee is a fiduciary responsible for managing the assets in the beneficiary’s best interest.
There are many different types of trusts, but they mainly fall into two categories:
Revocable or living trusts allow the grantor complete control of the trust. The trust assets are outside of the probate estate. Revocable trusts can be changed; you may add you can change assets and beneficiaries. However, there’s no protection from creditors and no unique tax benefits.
Irrevocable living trusts to transfer assets upon death without going through probate. They provide more robust asset protection. Assets in an irrevocable trust are not accessible to creditors and, depending on how they are set up, may place assets outside of the taxable estate.
There are also many specialized trusts. A Special Needs Trust is used to care for a person with special needs while maintaining their government benefits. You can use a spendthrift trust to leave assets for people who aren’t capable (or interested) in managing funds responsibly. Trusts provide significantly more control over assets after death than wills. They may also be harder to contest after death since they go into effect while you are living and may remain in effect for many years.
Wills provide specific directions about how you want to distribute assets upon death. The will goes through probate, where the court determines if the will is valid and if the executor is acceptable, and then the will becomes part of the public record. Creditors can make claims against the estate; family members may challenge the will, and depending upon where you live, it could take many months or several years to settle the estate.
How are trusts and wills different?
1—Trusts can be more complex than wills and require management. The will goes into effect upon your death, and you can change a will whenever you want. You also can change a trust whenever you want, but only if it is revocable.
2—Trusts go into effect immediately and need to be funded, so you’ll have to transfer assets to the trust.
3—A trust is a separate legal entity, so assets are shielded from estate and inheritance taxes. Certain trusts do pay taxes, so speak with your estate planning attorney about how this may work for you.
4—Certain trusts put assets well beyond the reach of creditors. However, a trust may not be created solely for this purpose since it could be deemed invalid by a court. However, in most cases, trusts work well to protect assets to pass them along to beneficiaries. A will offers no such protection unless a “testamentary” trust is created under the will. This will created trust can operate precisely as an inheritance trust created for loved ones after you die and your revocable trust becomes irrevocable.
5—Planning for incapacity should be part of any estate plan. Once a trust is set up and funded, the assets immediately enjoy the protection by having a successor trustee in charge of assets if the grantor/trustee becomes incapacitated. A will only addresses what happens after you die, not if you become too sick or are injured and can’t manage your affairs.
6—The trust is the winner when controlling assets after death if you want to avoid probate. You can instruct the trustee to distribute funds to beneficiaries only under certain conditions and terms. If you wish beneficiaries to finish college, you can direct the trustee to distribute a certain amount of money only after the person completes an undergraduate degree. You can also use the money to pay for their college education.
For most people, a combination of a will and trust works to control assets, prepare for incapacity and, just as importantly, provide peace of mind.
Bottom line: estate planning is complicated, not a do-it-yourself project, and should be done with the counsel of an experienced estate planning attorney.
Reference: Yahoo! Money (June 5, 2022) “Trust vs. Will: What They Share (And 6 Ways They are Different
