What is the Difference Between a Trust and a Will?
September 30, 2016
Making arrangements for your loved ones in the event of your death may not be something you wish to think about, but it’s an essential part of a sound financial plan. It is important for you to ensure that your family and loved ones are taken care of and that your assets are distributed the way you want. When establishing an “estate plan” for your assets you have a number of options, but the most common are a Will, or a Revocable Living Trust. There are crucial pros and cons to both Wills and Trusts, so let’s take a minute to compare the two.
How does a Will Work?
A Will allows you to determine what will happen to your financial assets in the event of your death. A Will is the less expensive option for most people, at least initially, because they are less expensive to have prepared. If your situation changes or you change your mind, a Will can be formally revoked by writing a new one, or can be amended by a Codicil. The major drawback with a Will is that your assets will have to go through Probate after your passing, which can take a substantial amount of time and money. Although you may be able to avoid Probate at least in part by having property co-owned or using beneficiary designations, there may be downsides to that kind of planning, including lack of control over your own assets during your life, tax consequences, and the inability for you to determine exactly when and how a beneficiary gets their share.
How does a Trust Work?
A Revocable Living Trust (or RL Trust) provides a mechanism to manage your property during your lifetime, in case you become incapacitated, and after your death. Under a RL Trust you would be your own trustee, and you would appoint a successor trustee to manage your finances in case you became incapacitated, without needing a guardianship or court oversight. After your death, the RL Trust would distribute your assets according to your wishes, without the need for Probate. The RL Trust can also be set up to distribute money to a beneficiary over time or after a certain event. For example, in a second marriage situation, a person can direct the Trustee to hold money for the benefit of a spouse until that spouse dies, and then distribute it to their children. Or the Trust can hold money until a child graduates from college or turns 30, or can distribute money over a number of years to keep them from getting it all at once. A RL Trust can also keep your estate plan private; when a Will is probated the Will and all probate papers are available to the public, but a RL Trust never becomes part of the public record. [An Irrevocable Trust can also be used to protect assets from Medicaid claims and taxes]. The downside to a Trust is that they are more expensive to set up initially, and there may be additional costs in administering the Trust. For many people, the additional cost may not be worth the eventual savings.
Which Option is Best for You?
There are a number of things to consider when deciding how you’d like to set up your estate plan, including amount and type of assets, location of real properties, your family situation, and what you want to accomplish. Trusts are more costly to set up, but may save probate costs and trouble in the long run. However, a Trust is not necessarily for everyone; some people would be better off with a simple Will and some well planned beneficiary designations. If you do decide on a Trust, it is important to make sure that your assets are properly transferred into the Trust–too many people paid a lot of money for a Trust in a thick leather binder, only to have their family discover after their death that there was nothing actually in the Trust. There are also some assets that you may not want to have in your Trust, such as certain retirement plans or co-owned property. You need to make sure that the right assets –and only those assets–are properly transferred into the Trust. An experienced estate planning attorney should go over the pros and cons of a Will versus a Trust, give you a recommendation about which would be better for your particular situation, and make sure that your assets are properly titled for your plan.
The decision of how to handle your assets in the event of your death can be overwhelming, but it is not impossible. For guidance and help making these important decisions, contact D. Kathleen Rus at DKRus Law. She has over 25 years of experience in estate planning, and would we happy to help you determine the best plan for you and your loved ones.
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