Author’s note: This post was originally written in 2016, but I have revised it with new and updated content.
Is it better to have a will or trust?
When discussing people’s estates and whether they have a will in place, there is one question that frequently arises: “Should I have a will or a trust?” And, “which one is a better choice for me?”
There is no simple answer to this question. In fact, the answer is a very personal one and will vary depending on one’s individual circumstances.
What is the difference between a will and a trust?
One of the main differences between a will and a trust is that a will must go through a sometimes costly, often lengthy legal process called probate before the assets may be distributed. During the probate process, your debts and any estate taxes will be paid out of your estate before your heirs receive their bequests, in addition to other fees.
What are the advantages of having a trust?
1. A living trust provides privacy. A living trust provides a much higher degree of privacy because a trust does not have to go through probate and thus, won’t become a public document. Upon your death, your estate is distributed in private, and will not be public record.
2. A living trust preserves assets for your heirs and chosen charities. A living trust is revocable, and you can make changes to it at any time during your life. However, upon your death, your trust becomes irrevocable and your trustee must administer the trust as you have specified, to your heirs and designated charities.
If crafted correctly, your trust can include language that allows the trustee to make special elections which can minimize or eliminate federal and/or state estate taxes. Language can also be included that allows the trustee to protect assets from creditors or a legal judgment against a trust beneficiary. It’s probably good to note here that a will cannot do this.
3. A living trust ensures retirement accounts are distributed efficiently. If your trust is the beneficiary of your retirement accounts, the trustee can construct withdrawal limits according to the retirement account's minimum required distributions. This is often done based on the life expectancy of the oldest beneficiary and can be very helpful because it prevents the beneficiary from liquidating the retirement account and accidentally triggering a large income tax obligation.
4. A living trust allows you to specifically control distributions to beneficiaries. Whether your beneficiaries are your children, grandchildren, or other family members, you can control when and how much the trust distributes to your beneficiaries. For example, if you want to specify disbursements for education or health care expenses, you can do that. You can also trigger disbursements when beneficiaries reach a certain age or certain ages. For example, if you want to distribute one-third of the principal at age 21, one third at age 30, and one third at age 35, you can do that as well.
5. A living trust enables a smooth transition if you become ill or incapacitated. Living trusts are written so that your handpicked trustee can automatically take control of your finances in the event that you are not able to do it yourself anymore. It’s important to note that this can be done without court intervention, which is highly desired by most people. And, since trusts are revocable, if you dispute your incapacity, you can retain control yourself.
Do you need a trust if you have a will?
So, we’ve established some very important reasons why you should have a trust. Along with your living trust, it might be beneficial to have a pour-over will. A pour-over will serves as a safety device to capture any assets that are not transferred to or included in your living trust. In addition, a pour-over will allows you to designate a guardian for your minor children, while a living trust cannot do that.
One last thing to consider is a living will, also known as an advance medical directive. A living will is a statement of your wishes for the kind of life-sustaining medical intervention you want (or don't want), in the event that you become incapacitated and unable to communicate.
Please note these are general recommendations and may not apply to everyone. You should consult with an estate attorney and your finance and legal team to understand whether a trust is right for your individual situation. As always, feel free to contact me if you have any questions.