“In his heart a man plans his course, but the LORD determines his steps.” – Proverbs 16:9
Over the past 15 years as a financial planner, I am often asked, “should I have a will or a trust?” I sure wished every prospective client would ask this question because this would reveal they were planning ahead. The sad fact remains that less than half of adults have a will, let alone a trust.
Should you have a living trust?
Not everyone needs a living trust. However, the larger and more complex your estate becomes, the greater your need for effective estate planning to minimize taxation and pass assets and property to those you care about most. A living trust can be an essential tool to facilitate that planning.
Here are a few advantages of having a living trust and 5 reasons why it may make sense for you:
- A revocable living trust trumps a basic will. It contains all the instructions on where you want your money to go, and it offers you (the trustee) additional benefits.
- A correctly funded trust avoids probate while a will ensures probate to prove its validity. Probate will cost your beneficiaries time and money. In certain states, the probate process can drag on for years. Additionally, a will can be made public and can be challenged in court. A living trust preserves your family’s privacy and cannot be contested.
- A living trust can be used to tell your love ones your wishes if you were to become severely ill, disabled, or incapacitated. While a durable power of attorney gives someone the power to act legally on your behalf, not all financial institutions will recognize it. Valid living trusts are accepted by all financial institutions. Living trusts allow other trustees such as your spouse or another alternate trustee to step in and manage your affairs if you are unable to, without court approval.
- A living trust can also save on estate taxes if properly structured – split into two trusts upon the death of one spouse (what is commonly referred to as an AB trust). This preserves the estate tax credit of the spouse who died and the unlimited marital deduction for the remainder of the estate.
- A living trust lets you transfer assets to your heirs with conditions attached to preserve your final wishes. This allows you to control the way your assets are distributed even after you’re gone.
So a living trust sounds perfect…well what about the downside of these trusts?
With all these advantages what could possibly be the downside? Well, for starters, many who have simple estates may not need a trust…just now. If you are in your 30s, 40s, or 50s, you may have another 20 plus years before you pass away. Laws and estate tax situations change. It may be years before any of your instructions are implemented. Your final wishes could change several times before now and the time the Lord calls you home.
As an alternative, a well-written will and durable power of attorney may suffice until later in life. If you are married, any joint assets and property generally will pass from one spouse to another without probate.
Another downside to a trust is cost. What costs a few hundred for a will can often cost thousands of dollars for a trust. Is this expense justifiable at this stage of your life? It may or may not make sense to set up a trust today.
Be careful if you have setup a trust. Even if setup, some people never fund them. Meaning, they have the trust drawn up, but they never transfer assets from their name into the name of the trustee of the trust. I have seen far too many people make this common mistake! They properly fill out the paperwork or say they’ll get around to it “someday.” They then pass away without placing their bank accounts, investments, real estate, etc. into the trust. This would then expose those assets to probate and defeat the whole point of the trust. You need someone to look over your estate planning documents to make sure they are in good order.
It is often wise to have both a will and a trust.
Most likely, you would not put all of your assets into a living trust. There could be some assets outside of your trust that could be left in a will such as jewelry, family heirlooms, or other sentimental items. You could also use a document such as a pour over will to transfer any remaining assets outside the trust into the trust. This would allow those assets to be distributed according to the terms of the trust. So as you can see, wills and trusts can often complement one another.
What makes the most sense for your situation?
In order to find out what makes the most sense for you personally, I advise talking with a Certified Financial Planner™ and an estate planning attorney. Form a team to help you implement your final wishes and pass wealth in the most tax advantageous way.