When making estate plans, many people decide to use a trust or a will. Both of these documents serve important roles in a person’s estate plan. However, there are some distinct advantages of using a trust over a will.
One distinct advantage of using a trust over a will is the privacy that it offers. Wills must be probated. This involves the court having jurisdiction over the case. When a will is probated, it becomes a matter of public record. Some courts allow any such documents to be accessed by anyone with access to the court system. A trust provides privacy because it is not a matter of public record. It is administered privately by the named trustee.
Using a trust provides greater control over the assets and income. In a will, a gift is provided to the named beneficiary. However, a trust allows the grantor to establish a series of instructions for the trustee to follow about how the property should be used. In this way, the grantor can make definite instructions about how to manage the trust property.
Some individuals do not want to give an outright gift to another person before or after their death. In a will, there are no conditions to these gifts. However, in a trust, the grantor can establish conditions about when a person can receive gifts from the trust. For example, the trust may require the trustee to refrain from providing trust funds to a beneficiary until he or she graduates college, tests negative on a drug test or reaches a certain age.
Using a trust may help a person avoid the probate process. Probate is concerned with the assets that a person owns at the time of his or her death. If the person owns no property, his or her estate does not go through this process. A trust transfers legal ownership from the grantor to the trust itself. Not going through probate often helps a person’s estate be handled much more efficiently without the added expenses and time-consuming nature of the probate process.
Another advantage of using the probate process instead of a will is that the grantor can still retain the assets during his or her lifetime. If he or she becomes disabled, the trust may have language that allows the trust funds to be used for his or her own care. The property in a trust can be available for the grantor’s use in case of disability or other unforeseen circumstances. Having a trust also makes it possible to continuously manage property, income and trust funds during the grantor’s disability, which would not be afforded with only a will in place since a will does not make arrangements in the case of disability.
Avoidance of Conservatorship Proceedings
Since a trust can provide for the management of assets during a person’s disability or incapacitation, potential conservatorship proceedings may be avoided. This type of court proceeding is often intrusive and may require continuous court involvement. Guardianship or conservatorship proceedings can be complex and expensive, often requiring a bond, annual accounting and additional legal fees.
A revocable trust is often more flexible than a will. It may be more helpful in cases involving beneficiaries and assets that are in other states. With a will, there may be a need to establish a probate case in each state where property is situated. Trusts can also be readily amended.
When assets have already been transferred to the trust, it may be faster for the trustee to dispose of these assets according to the instructions in the trust document than it would take for the administrator of a will to dispose of the assets. When going through the probate process, the administrator must provide notice to known heirs and creditors and pay off debts before any distribution to beneficiary can occur. In contrast, assets in a revocable trust may be liquidated or distributed more quickly.
In addition, trusts can be created to serve a variety of purposes, both before and after the death of the grantor. During their lifetimes, grantors can create revocable trusts which they can alter, amend, or terminate at any time. A grantor of a revocable trust can serve as its trustee. The grantor effectively continues as the owner of the trust assets for tax purposes. The trust document can provide for a successor trustee, for example, upon a grantor-trustee’s death or disability, and include instructions for the subsequent management and transfer of the trust assets. Assets in a revocable trust pass outside of probate. However, because the grantor retains control of the trust while alive, the assets are included in the grantor’s taxable estate.
On the other hand, grantors give up their ownership rights to assets when they transfer to them an irrevocable trust, i.e., one which they do not control and cannot alter. Irrevocable trusts are managed by a trustee who is not the grantor. Provided the grantor has given up all control and beneficial interest in the trust assets, the income from the trust assets is not included in the grantor’s taxable income nor are the assets included in the grantor’s estate. If properly structured, the transfer of assets from the grantor to the irrevocable trust may protect the assets from the grantor’s creditors.
Special Purpose Trusts
In addition to providing for your heirs, estate plans often involve arrangements to support charitable purposes or address special family circumstances. Federal and state laws establish rules for creating trusts for specified purposes. Charitable trusts and “special needs trusts” are two types of trusts generally established during their grantors’ lifetimes.
The tax law provides special benefits for certain irrevocable trusts that benefit charities while providing some economic return to their grantor or beneficiaries. Charitable lead trusts and charitable remainder trusts that meet the tax code’s technical requirements can serve these dual purposes. These trusts’ creation, management, and termination are subject to complex tax law requirements. Charitable lead trusts are established for the life of one or more individuals or a specified term of years. The grantor transfers assets to the trust, supporting regular payments to charities. When the charitable lead trust’s term ends, the remaining assets are distributed to the non-charitable beneficiaries, for example, the grantor’s family members. These trusts can be set up during the grantor’s lifetime or according to a will. Depending on the trust structure, it may afford the grantor a partial tax deduction upon its creation, provide estate and gift tax benefits, or, in some cases, realize taxable income for the grantor.
A charitable remainder trust is an irrevocable trust that provides current income to the grantor or other designated non-charitable beneficiaries and a partial tax deduction based on the valuation of the contributed assets. The contributed assets are distributed to one or more charities upon expiration of the trust’s term, which may be a term of no more than 20 years or a term based on the life of one or more non-charitable beneficiaries.
Special Needs Trusts
Persons concerned about the financial needs of individuals with disabilities (i.e., “special needs” that prevent or limit their ability to provide their economic support), can create “special needs trusts.” Special needs trusts are legal arrangements that enable such individuals to receive financial support from the trust for particular purposes without jeopardizing their eligibility for federal and state public assistance programs, such as Supplemental Security Income (SSI) and other benefits. Because these trusts must meet complex requirements set by federal and state laws, legal experts should be consulted to ensure that their formation and operation will not disqualify the beneficiary from public assistance
If You Die Without a Will
If you die without a will, the post-mortem management and distribution of your assets, the handling of your debts, and the care of your minor children and other dependents will be dependent upon your state’s intestacy law and an administrator appointed by the probate court to manage your estate. Generally, these laws allocate a significant portion of the estate to your surviving spouse and divide the remainder equally among your children. They do not consider factors that might influence you to divide your estate unequally among your heirs. Your surviving spouse or a qualified adult relative or friend may apply to the court to be appointed as the administrator, but their appointment is not certain. Moreover, intestacy entails probate court processes, time, and professional fees, which could be lower if you die leaving a will and well-designed estate plan.
Accordingly, making a will that appoints your executor, determines who will receive your assets, and expresses your intentions on guardianships, charitable contributions, funeral, and burial should not be a late-in-life decision. Even if you are young, once you have assets and responsibilities to a spouse, children, and other dependents, you should have a will or other legal arrangement to determine the distribution of your assets and to help your survivors make decisions about other matters. You can revise a will during your lifetime as your personal or financial situation evolves or if changes in the law affect your planning.
Although children (natural or adopted) have a statutory right to inherit, a will allows you to disinherit a child if you choose to do so. To be effective, provisions for disinheritance must comply with state laws whose requirements vary. In states with community property laws, varying and detailed rules enable a person to disinherit a spouse. So you need to be aware of your state’s laws—whether it is a common-law state, a community property state, or an equitable distribution state. Note, too, that a person can only disinherit a spouse or child through a will.
Trusts, Retirement Accounts, Lifetime Gifts
You should be aware of other legal arrangements that can facilitate transferring assets directly to your heirs. These can include a trust that holds your assets and provides for future transfers, beneficiary designations for retirement and other financial accounts, and gifts of funds and other assets during your lifetime. These arrangements transfer property without the assets going through probate. And, you may transfer ownership during your lifetime through gifts.
Considerations for Using Trusts
Trusts are frequently used in estate planning. “Living trusts” created in the grantor’s lifetime facilitate the transfer of assets to heirs without the cost and publicity of probate. Transfers by trust can usually be quicker and more efficient than transfers by will. Such trust transfers enable grantors to maintain privacy concerning the nature and value of their assets. They can be used to keep the differing values of assets passed down to different heirs confidential. Ensuring privacy for family businesses and real estate held through entities not publicly identified with their owners are additional reasons for using trusts. Establishing a trust to hold and distribute assets upon your death does not protect the assets from estate taxation if your estate’s value exceeds the federal estate tax exemption, set at $12.06 million for an individual decedent in 2022.
If the value of your estate is not significant or your assets limited and straightforward, say, your residence and financial accounts, creating a trust to avoid probate may not be beneficial and could cost more than it is worth to create and manage. Although the use of wills can also be costly, trusts can involve more substantial costs. Using a trust entails legal expenses and the cost of transferring property titles to the trust. There also are expenses for ongoing asset management and legal compliance. Many assets, for example, IRA and 401(k) retirement funds, can be transferred outside probate. During your lifetime, you designate your beneficiaries for such accounts with your bank, investment adviser, or employer, as the case may be. Properly structured and documented, married couples’ joint ownership of bank accounts and real estate can provide a right of survivorship that does not require probate.
Importance of Wills and Trusts for Same-Sex Couples
If you are part of an LGBTQ+ legally married couple, then estate planning will essentially be the same for you for married straight couples. However, estate planning for unmarried couples, LGBTQ+ or straight, is essential, especially for long-term partners. If you are in a partnership but not legally married and die intestate (without a will), your partner could find themselves fighting with family or others over the departed assets. LGBTQ+ couples could face potential discrimination from outside family members, and without a will, state laws may favor blood relatives over partners.
For example, if you die without a will, your state’s intestate succession laws will determine who inherits your belongings, including your home. If your partner is not on the mortgage or lease, creating an estate plan with your partner can help ensure your relationship status is legally recognized by the state if one of you dies.
The goal is to ensure that the surviving partner can access all the legal benefits, despite not being legally married. Making a will or trust, writing out a power of attorney document and health care proxy, and naming a financial power of attorney, are all ways to ensure you or your spouse’s plans for your estate are carried out. If one of you has underage children but your spouse has not legally adopted them, it is critical to list their guardianship. Otherwise, the courts may decide who raises them.
Are Trust Assets Left to a Beneficiary Part of Your Taxable Estate?
It depends. If the trust is a revocable trust which you control and you have the right to receive (or direct) any economic returns, the trust assets will be includible in your taxable estate. If the trust is irrevocable, and you have completely relinquished all ownership rights and the assets can be excluded from your taxable estate.
Does Transferring Property to a Trust Protect It From Creditors?
The vulnerability of trust assets to the claims of a grantor’s creditors is largely determined by state law. If a grantor transfers assets to an irrevocable trust for the benefit of third parties or purposes and has relinquished all control, rights, and benefits with respect to the assets, and jurisdictions, the courts usually treat the assets as beyond the reach of the grantor’s creditors. However, if assets are transferred to a trust with the intention of avoiding creditors, or under circumstances indicating it would be reasonable to assume that creditors would seek the assets, the trust is unlikely to insulate the assets from the creditors’ claims.
Individuals who are considering drafting a trust or a will may wish to consult with an estate planning lawyer. He or she can explain the advantages of using a trust as well as a will. He or she can make recommendations based on the specific considerations of the client. He or she may even recommend using both documents, such as by using a pour-over will that places any property owned at the time of the testator’s death into the trust.