When people think about estate planning, they often think about wills. The will – or more formally, the last will and testament – is a fundamental estate planning tool. However, it’s not the only estate planning tool, and depending on your situation, it may not be sufficient to meet your goals. If you want to control what happens to your assets, you need to consider the pros and cons of using a will or trust.
Defining Wills vs. Trusts
Wills and trusts are both estate planning tools, but they work differently.
- A will is a document that directs how you want your assets to be distributed. The will can also name an executor of your estate and a legal guardian for your child.
- A trust is a legal arrangement in which one person or entity (called the trustee) manages assets on behalf of another person.
Different Types of Trusts
Not all trusts are the same. There are actually several different types of trusts, and they can work very differently and serve different purposes.
- Testamentary trusts are created when a person (the decedent) dies in accordance with the decedent’s will, and they are funded with the decedent’s assets.
- Living trusts are created when the grantor (the person whose assets fund the trust) is still alive.
- Revocable trusts are trusts where the grantor retains the right to change the provisions of the trust.
- Irrevocable trusts are trusts where the grantor does not retain the right to change the provisions of the trust.
When Are Trusts Useful?
Trusts can help people meet many of their estate planning goals, including making sure that their assets are distributed according to their wishes, making sure that their heirs are provided for after a person’s death, and avoiding excessive estate taxes.
Living trusts are often used to avoid probate. By establishing an irrevocable trust, the grantor may also be able to avoid estate taxes on the assets in the trust.
Testamentary trusts are often used when the beneficiary cannot or should not be in charge of managing the assets themselves. A common situation involves young children. State law often prohibits minors from inheriting assets directly, so it is necessary to have assets managed by someone else. A trust is one way to do this.
However, testamentary trusts aren’t just about legal necessity. You’ve probably heard tragic tales of people whose lives were ruined after winning the lottery. Things can also go wrong when a person inherits a large sum of money – not all 18-year-olds will be responsible enough to spend their new fortune on college or on the down payment for a house. Trusts can be used to release funds in a responsible, predetermined way. Testamentary trusts are also useful when leaving funds to adults with special needs, a history of addiction or other circumstances that could make managing an inheritance complicated.
Do You Still Need a Will if You Have a Trust?
Although people often talk about whether it’s better to have a will or a trust, the reality is that you may need both. Some people may be fine with just a will. However, if you set up a trust, you’ll probably still need a will.
Testamentary trusts are created in a will, so the will is still a key part of your estate planning strategy. Even if you allocate your assets using an irrevocable trust, you may still need a simple will to cover other estate planning issues.
Estate Planning Options Beyond Wills and Trusts
Depending on your situation and the type of assets you own, wills and trusts may not be your only options.
Sometimes people with houses or other real property want to know if they can just add someone’s name to the deed. Although this may be possible, it can also create unintended consequences and may not be the best strategy.
A transfer on death deed can be used to transfer ownership upon the original owner’s death. This method is sometimes seen as a simple way to avoid probate. However, it may not be suitable in all cases, for example, when a testamentary trust makes more sense.
The Right Estate Planning Tools for Your Situation
Still not sure if you should use a will or trust? An experienced estate planning attorney can help you select the right tools for your needs. Contact Skinner Law.