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Estates & Trusts

Estate Planning: Wills vs Trusts

By November 19, 2015No Comments

Will vs Trust


When thinking about basic estate planning, it can sometimes be confusing whether to set up a will, a trust, or both. Below we explain the definition of each one as well as advantages and disadvantages of them for estate planning purposes.

Will

A will is a written document that has been signed and witnessed indicating how your property will be distributed at date of death. It is revocable and subject to amendment or cancellation at any time during a person’s life. A will also enables you to appoint a guardian for children who are still considered minors.

Other advantages of creating a will include the following:

  1. Setting up a will is general inexpensive and simple to create
  2. Creditors face a cut-off date for bringing claims against one’s estate
  3. No transfer of property or funding is required to create a will or make it valid

On the other hand there are also some disadvantages to having a will. The most notable disadvantages are as follows:

  1. Upon probate a will becomes a matter of public record
  2. Probate lawyers typically control the actual distribution of your property even though you may have appointed an executor of your will
  3.  A will does not provide for a transfer of assets or management of one’s property if one should become mentally or physically incapacitated
  4. A will is subject to estate taxes. Therefore, if you are above the exclusion amounts in your estate, a will may not be the most advantageous distribution of wealth upon death.

 

Trusts

Trusts provide property management during one’s lifetime and after one’s death. If the grantor of the trust serves as their own trustee, the trust instrument will provide for a successor upon death. Additionally, if the grantor becomes disabled due to an accident or illness, the successor trustee can manage the trust property. Court intervention is not required, and thus, the expense, publicity, and inconvenience of court-supervised distribution of your estate can be avoided.

Other advantages of establishing a trust include the following:

  1. Avoidance of probate on assets, which can take up to 3 years to complete and potentially take up to 10% of the value in your estate
  2. Prevention of financial affairs becoming a matter of public record
  3. Enables planning for the possibility of incapacity
  4. Control over what happens to one’s property after the date of death by setting provisions on when the assets are to be distributed to the beneficiary(ies) based on age, life events, etc.
  5.  Applicable for any size estate
  6. A trust may have estate tax advantages on the federal and state levels, depending on the state you live in and the value of your estate. If correctly written, a trust’s assets can be excluded from your estate and will not be subject to any estate taxes

 

While a trust does have many advantages, there may also be some drawbacks. Typically, a trust is more expensive to set up than a will because it must continue to be managed by the trustee after it has been created. Most importantly, however, a trust is not useful unless it has been funded. A trust can only control assets that have been placed into it. If there has been no transfer of assets or funding for the trust, one’s estate will still be subject to probate and there may be significant estate tax issues.

 Irrevocable vs Revocable


One thing to take into consideration regarding trusts is that they can be termed as “revocable” or “irrevocable.” A brief explanation of the two is as follows:

  1. A revocable trust allows the person creating it to change his or her mind regarding the property placed into it or the existence of the trust itself.
  2. An irrevocable trust means that once you place property into the trust, you cannot retrieve it again, as it now belongs to the trust. Therefore, this property is not included in the estate’s value for estate tax purposes, making it one of the biggest potential benefits of an irrevocable trust.  Depending on the size of your estate this may or may not be of concern and should be carefully considered.

 

Wills and trusts can be a very complex, but necessary, wealth management vehicles. Please don’t hesitate to give us a call if you would like to discuss wills and trusts in more detail.

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