Estate planning is a crucial aspect of managing your wealth and ensuring that your assets are distributed according to your wishes after you pass away.
Two of the most common tools used in estate planning are wills and trusts.
While both serve the purpose of outlining your intentions for your assets, they have distinct differences that make them suitable for different situations.
In this article, we'll dive deep into the world of a will vs trust, exploring their key features, advantages, and disadvantages, to help you determine which estate planning tool is right for you.
Key Takeaways
Wills and trusts are both estate planning tools, but they have distinct differences in terms of simplicity, cost, privacy, and control over asset distribution.
Wills are simpler and less expensive to create, but assets are subject to probate, which can be time-consuming and costly. Wills also become public record.
Trusts, such as revocable living trusts and irrevocable trusts, offer advantages like avoiding probate, maintaining privacy, and providing greater control over asset distribution.
Special purpose trusts, such as Special Needs Trusts and Charitable Trusts, can address specific situations and needs.
When choosing between a will and a trust, consider factors like estate size, privacy concerns, and control over assets, and consult with a financial advisor and estate planning attorney to make informed decisions based on your unique circumstances.
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What is a Will?
A last will and testament, commonly known as a will, is a legal document that specifies how you want your assets to be distributed upon your death. It allows you to name beneficiaries, designate specific inheritances, and appoint an executor to oversee the probate process.
Additionally, a will enables you to nominate guardians for minor children and make provisions for their care and upbringing.
Advantages of a Will:
Simplicity: Wills are generally more straightforward to create and maintain compared to trusts. The process of drafting a will is often less complex and requires fewer formalities.
Cost-effective: Preparing a will is usually more affordable than establishing a trust. It typically involves lower legal fees and fewer ongoing maintenance costs.
Naming guardians: One of the key advantages of a will is the ability to appoint legal guardians for your minor children. This ensures that your children will be cared for by the individuals you trust most.
Flexibility: Wills can be easily updated or amended as your life circumstances change, such as the birth of a child, marriage, or acquisition of new assets.
Disadvantages of a Will:
Probate: One of the main drawbacks of a will is that the assets distributed through it are subject to the probate process. Probate is a legal procedure that involves validating the will, settling debts, and distributing assets. It can be time-consuming, costly, and emotionally draining for the beneficiaries.
Public record: Once a will enters probate, it becomes a matter of public record. This means that the details of your estate, including the value of your assets and the identity of your beneficiaries, become accessible to anyone who seeks the information.
Limited control: Wills offer less control over the distribution of your assets compared to trusts. With a will, your beneficiaries receive their inheritance outright, and you have limited ability to specify conditions or restrictions on how the assets are used.
Potential contests: Wills can be contested by dissatisfied family members or individuals who believe they have a claim to your estate. Will contests can lead to prolonged legal battles and strain family relationships.
What is a Trust?
A trust is a legal arrangement in which a trustee holds and manages assets on behalf of the beneficiaries. The person creating the trust, known as the grantor or settlor, transfers ownership of their assets to the trust.
Trusts come in two main categories: revocable living trusts and irrevocable trusts.
Revocable Living Trusts:
A revocable living trust, also known as a living trust, is a type of trust that can be modified or terminated by the grantor during their lifetime.
The grantor retains control over the assets placed in the trust and can serve as the initial trustee. Upon the grantor's death, the successor trustee distributes the assets to the beneficiaries according to the trust's terms.
Advantages of a Revocable Living Trust:
Avoiding probate: One of the primary benefits of a revocable living trust is that the assets held within it bypass the probate process. This means that the distribution of assets can be done more quickly and with less expense compared to a will.
Privacy: Unlike wills, trust documents are not part of the public record. This ensures greater privacy for your estate and keeps the details of your assets and beneficiaries confidential.
Flexibility: Revocable living trusts offer flexibility during the grantor's lifetime. The grantor can amend or revoke the trust as their circumstances or preferences change.
Incapacity planning: A revocable living trust can include provisions for managing the grantor's assets in the event of their incapacity. The successor trustee can step in and make financial decisions on behalf of the grantor, avoiding the need for a court-appointed conservator.
Irrevocable Trusts:
An irrevocable trust is a type of trust that cannot be easily modified or terminated once it is established.
When the grantor transfers assets into an irrevocable trust, they relinquish ownership and control of those assets.
Irrevocable trusts offer unique advantages, such as asset protection and potential tax benefits.
Advantages of an Irrevocable Trust:
Asset protection: Assets placed in an irrevocable trust are generally protected from creditors and lawsuits. This can be particularly beneficial for individuals in high-risk professions or those concerned about potential legal claims.
Estate tax minimization: Irrevocable trusts can be structured to minimize estate taxes. By removing assets from the grantor's taxable estate, irrevocable trusts can help reduce the overall tax burden on the estate.
Medicaid planning: Certain types of irrevocable trusts, such as Medicaid Asset Protection Trusts, can be used to protect assets while still allowing the grantor to qualify for Medicaid benefits. This can be valuable for individuals who anticipate needing long-term care in the future.
Special Purpose Trusts:
In addition to the basic types of trusts, there are special purpose trusts designed to address children with special needs and give away your money intentionally.
Special Needs Trust: A Special Needs Trust is created to provide financial support for a beneficiary with disabilities without jeopardizing their eligibility for government benefits. The trust assets can be used to enhance the beneficiary's quality of life while preserving their access to essential public assistance programs.
Charitable Trust: A Charitable Trust allows you to support charitable causes that are important to you while potentially receiving tax benefits. There are two main types of
Charitable Trusts: Charitable Remainder Trusts (CRTs) and Charitable Lead Trusts (CLTs). CRTs provide income to the grantor or other beneficiaries for a specified period, with the remainder going to charity. CLTs provide income to charity for a specified period, with the remainder going to the grantor's beneficiaries.
Determining the Right Estate Planning Tool for You:
When deciding between a will and a trust, it's essential to consider your unique circumstances, goals, and priorities.
Here are some factors to keep in mind:
Estate size: If you have a substantial estate or own property in multiple states, a trust may be more advantageous. Trusts can help avoid the need for probate in each state where you own property, saving time and expenses.
Privacy concerns: If maintaining privacy is a top priority for you, a trust may be the better choice. Trusts keep your estate details private, while wills become public records during the probate process.
Control over assets: Trusts offer greater control over how and when your assets are distributed to beneficiaries. You can specify conditions, such as age milestones or educational requirements, that beneficiaries must meet before receiving their inheritance.
Complexity and cost: Wills are generally simpler and less expensive to create and maintain compared to trusts. However, the long-term benefits of a trust, such as avoiding probate and providing greater control, may outweigh the initial costs.
Will Vs. Trust: Hypothetical Example
To illustrate the practical application of wills and trusts, let's consider the hypothetical case of John and Sarah, a married couple in their 60s with an estate valued at $5 million. They have two adult children and a vacation home in another state. After consulting with their financial advisor at Covenant Wealth Advisors, they decided to an estate planning attorney to draft a revocable living trust.
By transferring their assets, including their primary residence and vacation home, into the trust, John and Sarah can ensure a smooth transition of ownership upon their passing. The trust allows them to avoid probate in multiple states, which may their children time and money. The trust also maintains privacy, as the details of their estate will not become public record.
Furthermore, John and Sarah include specific provisions in their trust to guide the distribution of assets to their children. They stipulate that each child will receive their inheritance in stages, with a portion distributed at age 30 and the remainder at age 40. This ensures that their children have time to mature and gain financial responsibility before receiving the full inheritance.
In addition to the revocable living trust, John and Sarah also create a pour-over will.
This type of will acts as a safety net, ensuring that any assets not transferred to the trust during their lifetime will be "poured over" into the trust upon their death.
They also use their will to nominate guardians for their minor grandchildren, providing peace of mind knowing that their grandchildren will be cared for by trusted individuals.
Conclusion:
Choosing between a will and a trust for your estate planning needs requires careful consideration of your unique situation, objectives, and family dynamics. While wills are simpler and more affordable to create, trusts offer advantages such as avoiding probate, maintaining privacy, and providing greater control over the distribution of your assets.
Consulting with a knowledgeable financial advisor, like those at Covenant Wealth Advisors, can help you navigate the complexities of estate planning and make informed decisions.
We can assess your specific needs and recommend the most appropriate tools to protect your assets, minimize taxes, and ensure that your wishes are carried out.
Remember, estate planning is not a one-time event.
It's crucial to review and update your plan regularly to reflect changes in your life circumstances, such as marriages, divorces, births, or deaths. By staying proactive and working with trusted professionals, you can create a comprehensive estate plan that provides security and peace of mind for you and your loved ones.
Author: Matt Brennan, CFP®
Matt is a Financial Advisor with Covenant Wealth Advisors and a CERTIFIED FINANCIAL PLANNER™ practitioner.
He has over 19 years of experience in the financial services industry in the areas of financial planning for retirement, tax planning, and investment management.
Disclosures: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond, Reston, and Williamsburg, VA. Registration of an investment advisor does not imply a certain level of skill or training. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. This article was written and edited by a CERTIFIED FINANCIAL PLANNER™ professional with the assistance of AI. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible but no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice.