You have likely heard the words “will” and “trust” as part of estate planning. What are the differences between the two, and how do you know which one you need?
A will is the most commonly used legal document for leaving instructions about your property after you die. It is also used to name an executor — the person who is in charge of your assets, their distribution, paying taxes and any estate expenses after you die. The will is also very important if you have minor children, because it is where you name guardians (backup parents) to raise your children if something unexpected occurs to you and your partner, spouse or co-parent.
The main downside of wills is that they are often an inefficient, costly and un-private way to transfer property to your loved ones after you pass away, due to the probate process required to transfer significant assets.
The desire to avoid probate is therefore one of the most common reasons people often use a living trust as a will substitute, says The Houston Chronicle in the article “Elder Law: Which should I have—A Living trust or a will?”
Here are a few advantages of living trusts (also referred to as revocable trusts, because their terms can be changed during your lifetime):
Avoiding probate in your home state
The cost of probate alone is often reason enough to use a revocable trust. As noted in this article by the author, probate costs can be very high when a person owns real estate, for example. Furthermore, if your assets are in a trust, your assets won’t need to be inventoried with the local courthouse after you pass away. In other words, a trust can help keep your asset information private, by ensuring that it is only seen by the beneficiaries.
Avoiding probate in another state
If you own out-of-state property, your estate may need to be probated in your home state and in the other state. If you have a trust, however, out-of-state property can be deeded into the trust during your lifetime, thus avoiding the need for a probate after you die. After your passing, your trustee can handle the out-of-state property without going through probate in that ancillary state.
Asset management for incapacity
A living trust goes into effect while you are alive. Therefore, if you become mentally or physically incapacitated and have a trust in place, an alternate trustee can step in to manage assets, pay bills, and ensure that finances are taken care of. This avoids the need for a costly and embarrassing court process called a conservatorship.
The authority of a trustee (especially in California, as the California living trust is a very popular estate planning technique) is widely recognized by banks, investment companies, title companies, etc. That is in contrast to a power of attorney, which can encounter resistance, especially if it is an older document.
The most complex part of having a living trust is the process of funding it. Funding the trust is imperative for it to work. The funding process involves transferring or re-titling your assets out of your name and into the name of the trust. If assets are left out or incorrectly titled, then probate will probably be necessary.
Funding the trust becomes complicated when retirement accounts are involved. During the lifetime of the retirement account holder, retirement accounts should not be transferred into the trust for tax reasons. Where the trust can come into play with retirement accounts is when the trust is named as a payable on death beneficiary (often as a contingent beneficiary if a spouse predeceases, for instance). Be sure to consult with an experienced estate planning attorney if you want to make the trust a designated beneficiary of a retirement account. This is because very specific and complex rules apply that may limit the ability to “stretch” the distributions from the account if the trust does not have the correct language, or if older and younger individuals or charities are named as beneficiaries.
Using a trust instead of a will is growing in popularity, and for good reason, but it should never be an automatic decision. An estate planning attorney will be able to explain the pros and cons of each strategy and help you and your family decide which is better for your unique situation.
Reference: The Houston Chronicle (Feb. 15, 2019) “Elder Law: Which should I have—A Living trust or a will?”