Have you wondered what the difference between a Last Will and Testament and a Trust (Revocable or Irrevocable) is, and if one is better than the other? We get this question frequently, and the answer is that it depends on your situation and your goals.
Last Will and Testament
A Last Will and Testament is a document you create during your lifetime that directs where your assets that are subject to probate (the formal process of having your assets distributed through the court system) will go at your death. Your Will is only effective at your death; it does not have any power if you are incapacitated but still alive. A Will does not avoid probate, but rather makes sure that your assets go to the people you want instead of being distributed according to the laws made by the government.
Wills have certain requirements that can cause problems for some families. Your Will is filed in the probate court and is a public document. Additionally, for a Will to enter probate, all of your heirs must be notified. If there are people you have intentionally disinherited or family members who might become upset during probate, a Will might not be the best option. Probating a Will also takes time. No one will have legal access to your assets until an Executor is appointed by the court, which can be inconvenient and sometimes stressful. However, with proper planning, including updating your beneficiaries and creating payable on death designations, you can avoid most or all of the probate process and provide your loved ones with funds more quickly.
Most people believe you must have a certain level of wealth to need a Trust, but this is a misconception. The most common type of Trust is a Revocable Living Trust (sometimes called a Revocable Trust or a Living Trust), which is really just an estate planning tool that will manage your assets during your lifetime and distribute assets after your death. A Trust can be revocable or irrevocable, depending on your reasons for creating one. A Revocable Trust means you have control of the agreement during your lifetime and can change it or terminate it at any time, while an Irrevocable Trust tends to be more complicated and is often used to minimize taxes. Trusts are not made public; only the people named in the Trust have a right to see the document. A Trust, unlike a Will, is effective as soon as it is signed. If you are living but incapacitated due to dementia or other factors, someone else you name can manage the assets in the Trust for your benefit. A Trust also avoids probate, which means that upon your passing, your assets can be distributed immediately without any petitions or court involvement. However, a Trust requires work. To have a Trust work correctly, you must retitle assets, update your beneficiaries, open new accounts, and review the document and your assets every few years to make sure the Trust is still up to date. If a Trust is not properly funded, it is not as effective and may not avoid probate. As you sell and purchase residences or other properties, acquire new assets, change jobs and retirement accounts, and welcome new members to your family or say goodbye to others, you will need to take action to keep your Trust current.
Benefits of Your Revocable Living Trust During Your Lifetime Anytime you are living and have capacity, you can change your Revocable Living Trust. You can decide to change a single provision or rewrite the entire document. You have the power to appoint and remove people named in the Trust, to change the distribution, to make new gifts, or to update the terms to keep up with current law. As the owner and Trustee of your Trust (person who manages the trust), you make all management, investment, withdrawal, and contribution choices.
If you become incapacitated, your Revocable Living Trust allows your successor Trustee to manage your assets for your benefit without court intervention. This means that a Conservatorship (court-ordered asset management) is not necessary. No Conservatorship means no court accounting or filing, so there is less time and expense involved, which makes the job easier for those caring for you. Additionally, your Trustee can more easily manage your finances and has more freedom in how to invest those assets for your benefit.
Benefits of Revocable Living Trust After Death
Because there is no court involvement through probate, a Revocable Living Trust saves time, money, and aggravation. You can create any plan you desire, leaving your money to the people or charities you want under the terms you decide. Sub-trusts can be customized for your family's needs. A Revocable Living Trust can make the process of distribution easier and faster for your loved ones. After your death, your Revocable Living Trust becomes irrevocable, so no one can change the people, terms, or any part of the trust.
Considerations for a Revocable Living Trust
A Revocable Living Trust allows you to be the Trustee during your lifetime. You may also name someone to serve with you, or in place of you if you no longer want to manage your Trust. The most important qualification for a Trustee is found in the name: Trust. A person in this role should be someone you can depend on for everything. This person will control your finances, know your personal information, potentially make decisions about your well-being, and be in charge of carrying out your wishes when you are gone. While Trusts can be more efficient, there is no oversight. Your Trustee does not report to a court or make accountings to anyone other than the beneficiaries. No one is looking over your Trustee's shoulder. A Trust is not filed anywhere or officially recorded.
Additionally, a Revocable Living Trust requires upkeep and work. A Revocable Living Trust is a vessel, like a glass, and it only works if you put things inside of it. You must re-title your accounts, update your beneficiaries, and deed property into the Trust for it to work. As you obtain new assets through the years, you must keep up with the ownership and paperwork to be sure the Revocable Living Trust is the owner or beneficiary.
A Word on Irrevocable Trusts A Revocable Trust
does not provide asset protection from taxes, creditors, or estate tax. If one of your goals is to achieve asset protection, you should talk to us about an Irrevocable Trust. While these kinds of trusts have the advantage of protecting your assets, they cannot be changed and often require an independent party (not you) to be the Trustee. While some families need this level of protection, we will need to have a long and detailed discussion to find the right balance between control and protection. There may be other ways to protect your assets, or an Irrevocable Trust may be the right solution. Additionally, there are many different kinds of Irrevocable Trusts. Each one is created for a specific goal and purpose. Medicaid or special needs planning, business consolidation and succession, asset protection, and shelter from estate tax are just a few of the reasons to consider an Irrevocable Trust. A good estate planning attorney will look at your family's needs holistically to craft an estate plan that maximizes tax advantages and asset protection, yet allows you to maintain the greatest possible control over your own financial assets.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.