One of the questions I hear from clients looking to start an Estate Plan is “Do I need a Trust?” There are distinct differences between a Revocable Trust, often referred to as a Living Trust, and a Last Will and Testament, which could determine why you may want to utilize one over the other. This is a 50,000-foot view and is by no means comprehensive.
For most individuals and couples, a Will is just fine and serves the purpose intended, which is distribution of assets upon an individual’s passing (i.e. who will get your stuff when you die). In simple terms, a Will permits an individual to provide for loved ones upon their passing according to their wishes as outlined in their Will. The process begins when the Will is probated upon an individual’s passing. There is a misconception among many people that, if they have a Will, the estate will not go through probate. This is not true, at least for the most part. However, there are some exceptions, including how assets are titled that could determine if assets go through probate. This is a topic of another post. Anyway, a Will is probated, which is the public process of settling an individual’s estate. There are fees involved with the probate process, which will vary depending on the size of an estate.
A deceased individual’s assets are distributed during the probate process according to the Will. Unfortunately, a Will does not permit for very flexible distribution of assets from an estate. That is, it may not be very effective if there are complex distributions to beneficiaries (those individuals receiving assets from an estate). Alternatively, if an individual’s distributions are somewhat straight forward and not complex, then a Will should be fine.
That brings us to the Revocable Trust or Living Trust. A Living Trust is typically more expensive than a Will. In many cases it is at least double the cost. However, it is a private document that does not have to be filed with the court upon an individual’s passing (i.e. it is not probated) and is not public for everyone to see as is the case with a probated Will. Likewise, as long as a Trust is funded properly, an individual’s assets will not go through the probate process, which saves time, costs, and headaches. The emphasis there is funded properly, meaning assets need to be properly titled to the Trust, also referred to as funding the trust. I have run into more than a few occasions when I have been engaged by a new client, who already had a trust, and the trust was never funded. It is a huge waste of money because the client has essentially paid for something they are not using. The individual also runs the risk of not having their assets distributed according to their wishes, and it could ultimately result in the estate going through the probate process anyway if they pass away prior to funding their Trust.
A Living Trust is also very flexible regarding distributions to beneficiaries. With a Living Trust, an individual can have numerous and complex distributions, distributions that outlast immediate heirs and provide for grandchildren, and/or distributions that provide for charities over a period of years. Establishing a Trust can also help to assist in limiting conflicts between heirs that may not get along by appointing a third party institutional trustee (i.e. a bank). The institutional trustee acts in an independent role as trustee and, thus, is not emotionally invested with the parties and any internal conflict family members may have.
Ten to fifteen years ago, one of the reasons many individuals and families desired a Trust was to avoid federal estate taxes since the federal exemption amount was considerably lower than it is today. However, now that is not as much of an issue unless an individual has considerable assets. The current federal exclusion amount for an individual is $11,180,000 for 2018, and double that for a married couple. Unless an individual has assets in excess of the exclusion amount, then that individual will be exempt from paying federal estate taxes. However, the payment of state estate taxes will vary from state to state. In Virginia there are no estate taxes, so zero is paid in estate taxes at the state level regardless of the size of the estate.
That is the 50,000-foot view on the comparison between a Will and a Trust. Again, there are so many unique situations that could tip the scale one way or the other for individuals and families based on their own particular situations. I invite you to discuss it further with us. We'll be happy to answer any specific questions you may have regarding your own situation.