Having a valid will in place is Estate Planning 101. After all, if you don’t have a plan for how your assets will be distributed after your passing, your state has a one-size-fits-all solution. So, having a basic plan in place that takes into consideration the particulars of your family, your assets, and other specifics is a fundamental step that everyone needs to take.
But there are some situations where a will may not be adequate for your estate planning needs. We’ve written previously about the use of trusts in estate planning and some situations where a trust might be a better and more appropriate solution than a basic will. In this article, we’ll dig a little deeper into various aspects of trusts and specific situations where a trust might be preferable to a will.
What’s the Difference?
The biggest difference between a trust and a will is that a will cannot take effect until the testator (the person who made the will) dies. So, in situations where individuals might want to exercise a bit more control over assets during their lifetime or might even want to benefit in some way from the assets while they are still alive, a trust can be designed to accomplish these purposes. Trusts can also be created as a part of the terms of a will; these are called “testamentary trusts.” But a trust can also be a “living trust,” taking effect and operating during the life of the person who creates the trust (the grantor). Another advantage of trusts is that they can be used to shorten the length of the probate process that is required to validate a will upon the death of the testator.
Uses of a Living Trust
Living trusts can be used to transfer property during the lifetime of the grantor, which can be helpful for those with sizeable estates who need to reduce the size of the taxable estate in order to control estate tax liability upon their passing. In fact, the principal advantage of a trust over a will is the degree of specificity it provides for the grantor. There are many different types of living trusts that can be used for various purposes, including charitable or philanthropic efforts, providing income to the grantor, and, as mentioned, for estate tax considerations.
Revocable and Irrevocable Trusts
As the name implies, a revocable trust can be revoked or changed by the grantor during the grantor’s lifetime. Irrevocable trusts are the opposite: once established, they cannot be changed or revoked by the grantor. There are various reasons why a grantor might choose one or the other, depending on the specific needs and circumstances of the estate.
Why Use a Trust?
Grantors may have several reasons for preferring a trust over a will. For example, suppose a person with significant assets has young children. They may wish to transfer assets into a trust that can be used for the benefit of the children, but the terms of the trust can limit the access to the assets until the children reach a certain age or even until they accomplish certain goals, such as graduating from college, for example. The grantor may also wish to appoint a trustee: a fiduciary person or entity that controls and manages the assets for the benefit of the child until certain conditions are met, as stipulated in the trust. Trust provisions like these can be especially beneficial for those who have children with special needs.
A trust can also be used to direct assets for charitable purposes. For example, persons with a strong commitment to a particular charity or other nonprofit institution may establish a charitable remainder trust: an arrangement whereby assets are transferred into the trust during the grantor’s lifetime, but still provide income to the grantor from the assets’ earnings. Upon the passing of the grantor, the assets remaining in the trust are passed to the charitable or nonprofit entity.
Another situation where a trust may be preferable to a will is when the estate consists of a significant portion of illiquid assets, such as real estate, business interests, or collectibles. A trust can hold these assets during the lifetime of the grantor and, upon the grantor’s death, the assets can be sold or distributed to the beneficiaries of the trust as desired by the grantor and stipulated in the terms of the trust.
Creating Your Estate Plan
These are by no means all the ways that trusts can be used or all the types of trusts that can be designed. Because each situation is different, it’s important to obtain the counsel of a qualified estate planning professional who is familiar with the laws of your state of residence. However, having a grasp of some of the basics of trusts and their uses can save you significant time as you develop the estate plan that is right for your needs.
At Mathis Wealth Management, our goal is to provide our clients with the information they need to make the right decisions for their situations. While we do not provide legal advice, we can outline many of the basic principles needed for a foundational understanding. We can also work with your estate planning professionals to ensure that your particular financial situation and resources are appropriately taken into consideration.
In this, as in most important financial matters, good communication is the key. To learn more, please visit our website to read our article, “Having ‘The Talk’: Communicating with the Kids about Your Estate Plan.”
