Both trusts and wills are useful estate planning tools, and they often work together to create a complete estate plan.
While both wills and trusts “tell” others who will receive your assets, they do it in different ways.
What Is A Will?
A will is a simple document that allows you to 1) name guardians for your children and/or pets, 2) designate where your assets go after you pass, and 3) specify your funeral arrangements.
The creator of the will, called a testator, appoints an executor to handle their affairs after they pass.
Even with this document and the appointed executor, you do not have complete control over the distribution of your assets because the will has to go through a probate process after you pass.
What Is A Trust?
A trust is a more comprehensive legal document that gives you greater control over when and how your assets are distributed because you can minimize or avoid the probate court process entirely.
There are several types of trusts that can be created according to your personal goals. Unlike a will, a trust needs to be funded. Your assets, including property and accounts, must be linked to the trust by retitling them and/or naming the trust as the beneficiary of the asset. At Baron Law, we work with individuals and their financial planners to take the necessary actions to fund the trust.
The creator of the trust, called a grantor, appoints a trustee to distribute the assets to the trust’s beneficiaries according to the guidelines specified in the trust.
Main Differences Between A Will and Trust
1. Timing
A big difference between wills and trusts is HOW and WHEN they take effect.
A will goes into effect after death, while a trust takes effect as soon as it is created. The trust may be used to distribute assets before death, at death or afterwards.
2. Probate
Only a will passes through probate. In probate, a court ensures the will is valid and oversees the administration of the will. If the court authenticates your will, it will pass through probate reaching your intended beneficiaries. If the will is not authenticated, your money might end up with the state, instead of your loved ones. The average time to administer a will through probate is 18 months and the process requires a number of fees – on average 5-7% of the value of the estate, or greater.
Courts do not need to oversee the distribution of a trust, which can save you a significant amount of time and money.
3. Privacy
Probate is part of the public record, meaning anyone may have access to your will, a list of your assets and their value, and a list of your beneficiaries. A trust provides privacy because the court record will only list the trust; not the details in the trust.
4. Taxes
Trusts can reduce estate taxes and protect your estate from creditors. The federal estate tax ranges from rates of 18% to 40%. A will does not avoid estate taxes.
Deciding Factors: Do I Need A Will, Trust or Both?
You can have both a will and trust. An estate planning attorney can help you select the right type of each that will work together to accomplish your goals.
If you have children under the age of 18, you will need a will to specify their guardians in the event of your death.
You can then discuss with the attorney whether a will, trust or both are the best way to manage, preserve and distribute your assets.
In most cases, a comprehensive estate plan includes a Pour Over Will and Living Trust. A Pour Over Will (versus a Last Will) is designed to work together with your trust, and acts as a backup plan to ensure all of our assets are directed into your trust.
Will Vs. Trust Comparison
- Will
- Beneficiaries Determined
- Executor / Trustee Named
- Establish Guardianship
- Avoid Probate
- Control After Death
- Protect Assets
- Tax Advantages
- Creditor Protection
- Privacy
- Will
- x
- x
- x
- Avoid Probate
- Control After Death
- Protect Assets
- Tax Advantages
- Creditor Protection
- Privacy
- Trust
- x
- x
- Establish Guardianship
- x
- x
- x
- x
- x
- x
Do I Need A Trust?
Below are some of the top reasons you might consider a trust:
I Want To Protect My Children’s Inheritance…
…from divorce. When a couple gets divorced, Ohio courts will divide all assets accumulated during the marriage 50/50, including an inheritance. So, if your child inherits $1 million dollars from your estate, and then subsequently gets divorced, the ex-spouse will receive $500,000. You can protect your child’s inheritance by creating a revocable living trust.
…from a second marriage. The most common scenario for creating a trust is when an individual is entering their second marriage. In this scenario, there is nothing preventing the remaining spouse from disinheriting children from a prior marriage. For example, a husband and wife in their second marriage care for two children the wife has from her prior marriage. The wife passes away and leaves everything to her husband, and the contingent beneficiaries are her two children. Five years later, the husband remarries and creates a new estate plan naming his new spouse as primary beneficiary of his estate and his two step-children as contingent beneficiaries. When the husband dies, the new spouse inherits everything and the children are accidentally or intentionally disinherited. If the wife were to establish a QTIP trust, her children would not lose their inheritance. The QTIP would give the husband income from wife’s estate, plus five percent of principal each year. When the husband dies, the estate must be passed to her children.
I Want To Control How My Children, Or Beneficiaries, Spend What I Leave For Them
No matter how they’re raised, it’s not uncommon for children to be irresponsible or need at least some level of guidance on how to manage a large inheritance. With a trust ,you can create payment terms so that children don’t blow their inheritance on impulsive purchases. For example, many trusts stipulate that children may only use funds for “health, maintenance, education, and support” until they reach a particular age.
I Don’t Want My Children To Be Burdened By Taxes
Receiving an estate may come with taxable consequences. The federal estate tax (aka “death tax) can vary depending on the exemption. For example, if the exemption is $100,000, then any inheritance over this amount would be taxed at a rate of 39.9%. The simple solution here would be to create marital deductive planning through a family trust. The surviving spouse could make a tax election through the trust significantly if not eliminating the death tax that would otherwise be incurred by heirs.
I Have A Child With Special Needs
A special needs trust helps you protect private funds for your disabled loved one without putting their eligibility for government-offered benefits at risk. There are three main types of special needs trusts: third-party, pooled, and self-settled. Each type of special needs trust would allow the special needs individual to continue to receive their government benedict that would otherwise have been forfeited through an outright lump sum inheritance.
I Want Someone I Trust to Manage My Assets Should I Become Incapacitated
If you establish a revocable living trust, and become unable to manage the trust, a trustee of your choice can take over for you. This will ensure that your assets are managed according to your wishes if you become ill or lose mental capacity.
I Have Property in Multiple States
If you manage multiple real estate holdings, and use a will to handle those assets, your beneficiaries will have to go through the probate process in each state. Putting each property into your trust requires transferring the deed and will help your beneficiaries avoid the long, expensive probate processes. Moreover, heirs who are married no longer are required to have their spouses sign off their dower rights.
I Want To Protect My Assets From Creditors
The most common asset protection trust is a revocable living trust. The grantor, or creator of the trust, can change the trust at any time during his or her lifetime. After the grantor passes away, the estate is placed in an irrevocable trust, where the trust can no longer be changed. The assets remaining in the trust after death cannot be attacked by creditors or litigation. In other words, if a child ends up in a lawsuit, the trustee can cease payments to the child so that the money is protected from the lawsuit. The same outcome would apply if the child ends up in bankruptcy or owes creditors.
Steps To Establish Your Will & Trust
While estate planning usually takes the form of a will, trust or both, there is no one-size fits all solution. A will and trust attorney will help you determine the right strategy for your family.
When preparing to meet with a will and trust attorney, it’s best to:
- Identify your goals. Is your focus on protecting assets, providing for loved ones, reducing taxes or all of the above?
- List your assets. What possessions, real estate, investments, insurance policies, etc. do you currently have in your name?
- Talk with your loved ones. Are they aligned to your choices regarding guardianship, administration or management of your assets?
Click here to learn more about estate and trust planning services at Baron Law, or contact us today at 216-573-3723.
This blog is for educational purposes only; it is not intended to provide legal advice. If you’re planning for your estate and want to speak with an attorney, call 216-573-3723.
