While Wills and Trusts do have a lot of overlap, there are also several differences between the two. Ultimately, both are ways to say who will receive your assets. They just do it in different ways, and each has its own advantages and disadvantages.
One big difference between the two is in how and when they take effect. Wills don’t go into effect until you pass away, whereas a Trust is effective immediately upon signing and funding it.
It may be easier to think of a Will as a “simple” document. Wills allow you to:
- Name guardians for kids and pets
- Designate where your assets go
- Specify final arrangements
While it is an easier process, the simplicity of a Will does come with some drawbacks. For example, Wills offer somewhat limited control over the distribution of assets. They also most likely have to go through some sort of probate process after you pass away.
A Trust is a bit more complicated, but can provide some great benefits. Trusts:
- Offer greater control over when and how your assets are distributed
- Apply to any assets you hold inside the Trust
- Come in many different forms and types
Keep in mind that after you create a Trust, you also need to fund it by transferring assets to it, making the Trust the owner. This does make Trusts a little more complex to set up, but note that Trusts have one major benefit over Wills. They’re often used to minimize or avoid probate entirely, which is a huge plus for some people. This alone could more than justify the additional complexity of setting up a Trust.
When we’re talking about Wills vs. Trusts, we need to keep in mind that they have very different and specific benefits. It’s not really accurate (or helpful) to assume one is “better” than the other. You should start by assessing your situation, your goals and your needs at the very beginning of the process. Only then can you find the solution that best-suits and protects your family in the most appropriate way.
Short answer: Yes, you can have both a Will and a Living Trust because they do two different things. Trusts provide for the management and distribution of your assets during lifetime and after death. A Will, on the other hand, allows you to do things like name guardians for your children, appoint an executor for your estate, and declare your final wishes. So what’s actually more crucial to understand is the type of Will to have with a Living Trust so that you can have the most comprehensive Estate Plan.
Let’s say you have both a Last Will and a Living Trust. This is not necessarily recommended and here’s why: The assets that are included only in your Last Will will likely have to go through an extensive probate process. Not to mention, Last Wills are public documents. Conversely, the assets included in a Trust are typically protected from probate court.
Enter: The Pour Over Will. Most Revocable Living Trusts (including the one you can purchase through Trust & Will) include what’s called a Pour Over Will, which is a type of Will designed to work in conjunction with your Trust. With a Pour Over Will, anything a person owns outside of their Trust — as well as anything that is subject to their Last Will — will be paid to your Trust at the time of your death. Pour Over Wills essentially act as a backup plan to ensure all of your assets go under your Trust.
Note that a Living Will is also different from a Last Will and a Pour Over Will (and yes, we know the names can get confusing). A Living Will refers to a set of documents related to an individual’s medical decisions. Included in those documents are:
· Medical Power of Attorney
· Advanced Health Care Directive
· HIPAA Authorization Form
When you become a member at Trust & Will, the documents included in a Living Will — listed above — are provided whether you opt to purchase a Trust or Will.
Just because you take the time to create a Will, it doesn’t mean your estate will avoid probate. Probate is the process your estate goes through after you pass away if you haven’t done proper or comprehensive Estate Planning. It is a court-supervised proceeding, and depending on how solid your Estate Plan is, can be costly and take a long time.
However, there are many ways you can simplify, or even eliminate all together, the probate process. One of the most effective ways to make it easier on those you leave behind is by creating a Trust as part of your Estate Planning. Anything you put inside your Trust can be passed down while avoiding probate. And, a big benefit to having a Trust is distribution of assets remains private, whereas distributing assets through a Will and probate are public.
As noted earlier, Wills do not go into effect until the moment you pass away. In contrast, a Trust is essentially in effect the moment you sign and and fund it.
Wills After Death
Your Last Will and Testament takes effect once you pass. At that time, someone must notify the court to begin the probate process. The subsequent events that take place in effort to settle your estate and distribute property and assets can take a long time and be expensive.
Another (rather big) point to consider is that since your Will only takes effect after you pass away, if you become incapacitated and unable to make decisions for yourself, you have no recourse or plan as directed by your Will. On its own, a Will is essentially useless while you’re alive. This means a Will, on its own, is not an effective end-of-life planning tool.
Trusts Impact Life and Death
Because a Trust instantly takes effect as soon as you sign it, it can simplify the process for those around you. But it’s very different from a Will in that your Trust not only plans for after you die – it’s a document intended to have an impact while you’re still living. A Trust can set provisions for things like what you want to have happen if you become mentally or physically unable to make your own decisions. It protects loved ones from having to make decisions about the unthinkable. Most importantly, a Trust can make sure your wishes are known, during your lifetime and after you pass, so the stress of wondering what you would want can be completely removed from the equation.
Planning for the future is important on so many levels. But it’s not lost on us that the process can seem overwhelming – where do you even start?
There are a lot of pieces to the puzzle, and too often people think “I’ll get to it later…” That’s risky. If you become unable to make decisions on your own, and you haven’t put a plan into place, all that burden and stress will fall on your loved ones as they try to make decisions for you, hoping they get it right. Creating an Estate Plan is a true gift to your family and friends.
Fortunately, you don’t have to go at it alone. Trust & Will is there for you every step of the way. We’ll help you choose the right Estate Plan for your exact situation, with your goals in mind.
Want to learn more about the differences between a Trust vs Will? Chat with a live member success representative or Take our simple quiz designed to match you with the perfect plan. The peace you’ll gain from setting up your future is worth it, trust us. Get started today, worry less tomorrow.
A Revocable Trust is a Trust that can be revoked, meaning it can be changed or updated at any given time as long as you’re still living and of sound mind. Also known as a Revocable Living Trust, this can be a good option if you want to establish a Trust, yet still maintain control over your estate and assets while you’re alive. Keep in mind that once you fund a regular Trust, the Trust becomes the owner, not you. Upon death, a Revocable Trust automatically becomes Irrevocable and cannot be changed.
Benefits of a Revocable Trust
Revocable Trusts are unique for several reasons.
· Flexibility: They are flexible when and if you want to ever amend them. Revocable Trusts are typically easier to amend than a Will.
· Avoids probate: Save your loved ones time, money and most of all, stress when you create a Revocable Trust by avoiding the process of probate.
· Originals not needed: Whereas an original Will must be present to be validated during the probate process, since Revocable Trusts don’t go through probate, an original is not required, which can greatly simplify things upon your passing.
· Continuous management: Even if you become incapacitated, as long as the Revocable Trust was funded, assets within it will continue to be managed without interruption.
One more important benefit of Revocable Trusts is they ensure property and assets remain readily available for you even if you become incapacitated. It’s true that you could just have a Durable Power of Attorney (POA) in place, but POAs are often more difficult for third parties to deal with.
Disadvantages of a Revocable Trust
While there are many advantages to a Revocable Trust, there are also some downsides, too. Some of the potential disadvantages to Revocable Trusts could include:
· No tax advantage: Revocable Trusts don’t save you money on your income taxes or estate taxes.
· No asset protection: While you’re living, a Revocable Trust doesn’t protect your assets from creditors.
· Need for updates: While Wills can automatically update or change after major life events just as birth of a child or divorce, a Revocable Trust need to be consciously updated.
· Administrative work: Retitling assets to be Trust-owned can be time consuming, but necessary to fund a Trust. Not all assets will need to be retitled, though.
On the contrary, an Irrevocable Trust is one that cannot be easily amended, changed or terminated once it’s signed. There are only a few, very specific, very isolated instances that would allow for an Irrevocable Trust to be modified. And in most cases, changes must be approved through the permission and consent of all named Beneficiaries.
Benefits of an Irrevocable Trust
The stringency of an Irrevocable Trust begs the question: how could it possibly be a good idea to get this type of Trust? But believe it or not, there are some distinct benefits to an Irrevocable Trust.
· Estate tax benefit: Items and assets you put into an Irrevocable Trust do not add to the value of an estate. That means creating an Irrevocable Trust could be a financially smart move for anyone with a very large estate. In 2022, estates valued at more than $12.06 million are subject to federal tax (note: the tax is applied only to any amount over that threshold). This value is projected to raise to $12.92 million in 2023.
· Asset protection: An Irrevocable Trust can protect assets from judgements and creditors. If you have a high-profile career or are otherwise likely subject to lawsuits, an Irrevocable Trust may be a good idea.
· Access to government benefits: Your wealth can actually count against you when it comes time to collect government benefits like Medicare and Supplemental Security income. By putting assets into an Irrevocable Trust, you may not have to deplete your savings and assets before qualifying for assistance. This can be huge in preserving wealth for your heirs.
Disadvantages of an Irrevocable Trust
There are some obvious downsides to an Irrevocable Trust. The main one is the fact that you can’t change an Irrevocable Trust once it’s finalized. Other disadvantages may be:
· Higher tax rates: Any income tax that an Irrevocable Trust earns will be taxed separately, and often at a higher rate.
· Additional tax return: An Irrevocable Trust will need to file a tax return, and there will often be a cost to prepare and file.
· Complex language and terms: Irrevocable Trusts usually have difficult Trust terms that may be hard to understand.
Some Trusts can be used for tax benefits. This is an important aspect to understand, because not all Trusts are created equally when it comes to the IRS and taxes. Some types of Trusts are better than others if the goal is to be tax beneficial.
Irrevocable Trusts & Estate Tax Avoidance
While Revocable Trusts do not save you when it comes to income taxes or estate taxes, Irrevocable Trusts actually can help you. An Irrevocable Trust can be a tax-advantageous strategy that your loved ones can benefit from after you’ve passed away. By putting your assets and property into the Irrevocable Trust, those items can’t be taxed after your death. In this sense, an Irrevocable Trust can actually help to reduce the value of an estate.
Avoiding Capital Gains Taxes
Another potential benefit to an Irrevocable Trust is you can use it to avoid personal capital gains based on the value of the estate. From a tax perspective, the Trust is its own entity with its own Tax ID number. An Irrevocable Trust may be used to reduce personal income and capital gains taxes by shifting those to the Trust and away from you. However, taxes on an Irrevocable Trusts can be complex and could even be higher than your personal tax rate.
There are many other types of trusts in addition to the two we’ve discussed here. Each has its own nuances, benefits and disadvantages, so it’s important to thoroughly understand them before deciding which is best for your needs.
· A-B Trust: Irrevocable Joint Trusts made by spouses that will divide into two Trusts once the first spouse passes. Often used to minimize estate taxes.
· Testamentary Trust: A Trust made within a Will, where the Will instructs how the Trust should be established after you pass.
· Life Insurance Trust: An Irrevocable Trust that will hold life insurance proceeds after you pass. Can be used to bring down the value of an estate as a means to reduce taxes.
· Charitable Trust: Trusts that donate some or all of your estate to the charity you identify. Can be structured to pay the charity first and then the balance to your loved ones, or the other way around.
Nobody wants to face the tough decisions that come along with Estate Planning, but doing so now means things will be a lot easier on those you love when the time comes.
Getting a Trust is the only way you can ensure your affairs are in order and that your wishes will be not only known, they’ll be honored. Reach out to Trust & Will today to learn more about how you can create a comprehensive, complete, concrete Trust as part of your Estate Plan. It’s the beginning of the legacy you’ll one day leave behind.