When it comes to protecting your loved ones, having both a will and a trust is essential.
The difference between a will and a trust is when they kick into action. A will lays out your wishes for after you die.
A living revocable trust becomes effective immediately. While you are alive you can be in full charge of your trust. And when you become incapacitated or die, the person you appoint as the successor trustee can easily step in and handle your affairs exactly as you have laid out in the document.
It is our strong opinion that you should have both a will and a living revocable trust.
What is Revocable Trust?
A revocable trust is a trust created during an individual’s life that can be changed or terminated at any time. The individual that creates the trust is called the grantor, the trustor, or the settlor. In most cases, the grantor is also the trustee of the trust as well as the primary beneficiary of the trust during their lifetime.
What does is do?
- Ensures privacy: The main purpose for a revocable trust is to avoid probate, the legal process of distributing assets of a decedent at death. Why? Because the probate process which includes taking an inventory of assets, notifying, and paying creditors, etc., is made available to the public. By avoiding probate, the privacy of the grantor and their beneficiaries is protected.
- Adheres to the wishes of the grantor: Similar to a will, a revocable trust will provide a thoughtful distribution of their assets to their heirs. The trust document can be amended an unlimited number of times, so the distribution of assets can be changed as the grantor ages or additional assets are acquired. At the death of the grantor, a trustee named in the trust document will work with the executor of the estate to follow the guidelines of the trust document.
- Creditor protection for beneficiaries: While revocable trusts do not provide creditor protection for the grantor, they do for the beneficiaries of the trust, but only if the assets remain in the trust upon the passing of the grantor.
- May reduce state estate taxes: For families living in a state with an additional estate tax, a well-written revocable trust may provide significant value by reducing state estate taxes.
What doesn’t it do?
- No tax benefits: There are many misconceptions about revocable trusts, the biggest being the purpose and benefit of a revocable trust for estate tax purposes. It does not have any benefit for estate tax purposes or even taxes during a grantor’s lifetime. In the eyes of the government, assets held within a revocable trust are the same as if they were held in the individual’s name.
- Fund itself: A revocable trust does not fund itself by merely creating the trust documents. To take advantage of the benefits listed above, account registration must be changed on each account owned by the grantor.
Many estate attorneys recommend a “pour over” will. Upon the grantor’s death, it will collect and transfer all additional assets (jewelry, cars, etc) into the revocable trust so that no assets go through probate.
- Eliminate the federal lifetime gifting and estate tax exemption: Moving assets into a revocable trust is not considered a gift and does not affect an individual’s federal lifetime gift or estate tax exemption, currently at $11,180,000 per person in 2018.
Why you need a trust
There are many types of trusts. A living revocable trust is the right trust for the vast majority of you.
Let us take this word by word:
- Living: A trust is effective during your lifetime.
- Revocable: Everything you state in the trust can be changed. At any time. That is what revocable means. So, relax. This is a legal document that you can change as your life changes.
- Trust: Once you create a trust you can move the ownership of key assets –such as a home and other property – into the trust and appoint yourself as the trustee, meaning you call all the shots on how to use and manage those assets while you are alive. You also appoint someone to be your successor trustee. If you become incapacitated, the successor trustee can step in easily and manage your affairs. Or, when you die, the successor trustee takes over without the need to get any court approval.
It is important to understand that if you only have a will, when you die your family may have to go through a lengthy court process to have the right to follow what you laid out in your will. This is called probate. In addition to being time-consuming and costly (you likely will need to hire a lawyer) it is also public. When you die with only a will, that document must be filed with the court, and can be accessed by anyone.
Smaller estates may be able to avoid probate if the deceased only had a will; but in most states, the cut off for what amount qualifies for a “simplified” probate is low. (You can learn more about your state’s simplified probate rules.)
The surest way to avoid probate is to have a trust. A living revocable trust does not need court approval. Everything stays private, and your successor trustee can take over its management immediately upon your death.
Why you need a will
As important as a trust is, you also want to have a will.
While your big-ticket assets, such as a home, should be owned by your trust, you likely have other smaller keepsakes –a china collection, watches etc. – that you want to give to a specific person. A will is where you spell this out.
A will is also where you can write down your funeral wishes.
If you have young children you must, must, must have a will. A will is where you appoint a guardian for minor children. I realize thinking about this can be upsetting, but let’s talk about something even more upsetting: if you die without a will that establishes your children’s’ guardians, decisions about the care of your kids are going to fall to the court system. That’s what happens when parents die without a legal guardian ready to step in. Sure, a sibling or cousin or dear friend might end up as the guardian, but only after a draining court process, and potentially ongoing court oversight.
You love your family more than anything, right? Having both a will and a trust is a powerful way you show your love. It will save your family time and money. And the heartache of squabbles if you were to die and not leave clear instructions on who is to get what.