When people ask if they need a Will or a Trust, I always give them the same answer: "It depends."
Each of these estate plans have merit, and each have overlapping similarities. The only difference is your intention. In other words, you need to know what you're looking to accomplish before you begin the process of creating a Will or Trust. To help you answer the question of, "Should I Have a Will or Trust?" let me go through the differences, then discuss which may be most advantageous for you and your family.
What Is a Will?
A Will is a written legal document providing for the disposition of property at death. Whenever you create a Will, you are basically doing two things:
- Saying how and to whom you want to distribute property at death; and
- Appointing someone to settle up your estate
For a Will to be valid in Missouri, it must be in writing, be signed by the Testator (i.e., the person creating the Will), and two disinterested witnesses (i.e., people who are not a part of the Will), all within the presence of the Testator.
A Will is the simplest way to provide for the distribution of property in one's estate. You can specifically state who you want your assets to go to, how you want them to be distributed, and even provide for a provision that allows you to distribute specific items of your household property without the need to write those gifts down in the actual document itself.
Wills also appoint a person to settle up your estate. This person is known as the "Personal Representative" or the "Executor." The Personal Representative basically acts like a power of attorney after your death. They are responsible for submitting the Will to court for validation, paying off any debts, taxes, and expenses that arise after your death, and distributing your assets to your beneficiaries. If you do not appoint this person in your Will, or if you do not have a Will at all, the court will appoint them for you. They have the power to do pretty much anything with your assets, which is good because you want to act in your place to help settle up your estate.
What Is a Trust?
To make it easier for my clients to understand, I usually tell them that making a Trust is pretty much like setting up a business for your estate. In other words, you are creating a document, usually called a Trust Agreement, whereby you state that you will transfer your assets into Trust to be held under the terms of the Trust Agreement.
A Trust is a form of ownership known as "beneficial ownership." In other words, you are transferring your property to someone called the "Trustee" (usually yourself if you are creating a Revocable Living Trust) to hold your property for the benefit of someone else (again, this person is usually you if you form a Revocable Living Trust).
There are two main kinds of Trusts: Revocable Living Trusts and Irrevocable Trusts. Revocable Living Trusts are called living for a reason; they are created during your lifetime and are used to help plan for different contingencies throughout your lifetime. They are also considered revocable, meaning they can be amended, revoked, or reformed at any point during your life so long as you are mentally able to do so. Irrevocable Trusts are trusts which cannot be changed, except for in limited circumstances. In the Irrevocable Trust scenario, you, as the person creating the trust, are transferring your assets to someone else (the "Trustee") for the benefit of a third party. The Trustee in this case will not be you, it will be someone else. Depending on the type of Irrevocable Trust, you may or may not be the beneficiary of the trust. This is an important distinction from the Revocable Living Trust scenario.
Because the assets held in trust are no longer technically owned by you, they are not considered to be a part of your estate. Thus, they are able to avoid probate and reduce tax liabilities.
"So, Do I Need a Will or Trust?"
First of all, it is important to have that discussion with an estate planning attorney like me. I am happy to work with you and have a discussion with you about your needs and what might work best for you and your family's situation.
Generally speaking though, there are some benefits to both, it just depends on what you're looking for.
- Probate Avoidance
Probate is the process for settling up a person's estate. Because assets held in a trust are removed from your estate, they avoid probate altogether. Wills, on the other hand, have to go through probate, so they do not avoid having to go to court to settle everything up. If you want to make it easier on your family after you are gone, it might make the most sense to create a trust instead. This will allow your family to avoid the frustration of probate. Trusts are also a completely private way of settling up an estate. Whenever you file a Will in probate, the court has to let your creditors know that you have died and that your estate is going through probate. With a trust, you avoid this scenario altogether. That's not to say that your creditors will not come collecting, but it is much harder for them to see what assets you have to pay themselves back with if you have a trust vs. a will.
- Planning For Life vs. Planning for Death
Trusts are documents which allow you to plan for certain life contingencies. Wills only come into effect after your death. If you have a Will, your family will not have as easy a time taking care of you in the event of your incapacity as they would if you had a trust.
For instance, let's say that you have young children (i.e., under the age of 18) and become incapacitated. If you simply had a Will, it would be a lot more difficult for someone to use your money to take care of your kids for you. They may end up covering any expenses which are incurred by helping to raise your children. If you had a trust, however, you could include a provision in there to allow your Trustee to use trust funds to pay for the education, health, support, and maintenance of your children who are under 18 in the event of your incapacity. This is a really useful tool and is one of the main reasons why I advise young families to have a Revocable Living Trust over a Will.
- Tax Matters
If you are a high-net worth individual, or have aspirations to be a high-net worth individual one day, trusts are the best way to avoid estate taxes (i.e., taxes which are imposed on a person's estate depending on their level of wealth at death). Why is that? If you form an Irrevocable Trust three years prior to your death, then the assets in that trust, if written by a proper estate planning attorney, will be removed from your estate entirely, thus avoiding taxes on those assets which may be above the estate tax threshold (currently $11.4 million). You cannot accomplish these same objectives with a simple Will since Wills only come into effect after your death. You can provide for how taxes will be paid in your Will, but you cannot remove assets from your estate to reduce the assets of your estate. It just doesn't work that way.
In conclusion, it really does depend on what your goals and objectives are in terms of creating a Will or Trust. For most young families, and for people with over $750,000 in total assets, I usually recommend having a trust just for the sake of ease on your family after your death. But, again, this is totally up to you. After all, you are the client.
But remember, you should talk with a trusted estate planning lawyer like me, Vince Taormina. I work with clients across the St. Louis area and am more than happy to have a discussion with how best to protect your assets and provide for your family. Schedule an appointment today!