A major consideration in the estate planning process is whether an individual’s needs and goals are best suited through a will or a trust. Several factors, such as an individual’s finances, family, goals and health, must be considered in evaluating whether an individual needs a will or a trust. A consideration of the goals and wishes of an individual, along with other factors such as cost, family and tax consequences determine whether a will or a trust is a better fit for an individual’s estate plan.
A will is an estate planning document that directs how one’s assets are to be distributed after death. Unlike a trust, a will goes into effect after death. Usually, to complete a valid will, the testator (the person to whom the will belongs) must be a competent adult 18 years of age or older, and the will must be written and signed by two witnesses. A will is submitted to the probate court in the county in which the testator lived, and a personal representative, as named in the will or named by the court if not specified in the will, is appointed to distribute assets, settle debts, identify beneficiaries, file tax returns, and complete other actions necessary to wind up the affairs of the deceased testator’s estate.
A major drawback to a will is the need to submit the will to the probate court. Thus, upon submission to the court, the will becomes a public document. Additionally, the probate court process can be lengthy, even if everything goes well. The probate process can be costly, particularly if the probate estate involves litigation.
On the other hand, a will has several benefits. Often, a will is less costly to draft than a trust. For those who are not worried about the lack of privacy, a will thus may be a much more cost-effective estate planning strategy. Additionally, for those individual’s without many assets or surviving family members, a will may be better suited for their needs than a trust.
A trust is an estate planning document where the trustee holds legal title for specified beneficiaries. A common trust is a living trust, which is established for the benefit of the grantor (the person who created the trust) for their lifetime, then for named beneficiaries after the grantor’s death.
Many people select a trust to keep their affairs private. Since a trust is not submitted to a probate court, it is not open to the public, thus allowing the trustee to keep the state of his/her affairs private.
Trusts are commonly selected by individuals with children. A trust is an effective method to allow for distribution of assets to children at specified intervals, while also using the assets of the trust for the children’s benefit, such as by paying for educational expenses. A trust also allows the grantor to provide for periodic distributions of trust assets to their children, thus preventing, for example, a child from receiving a large inheritance at a young age and squandering it. Additionally, trusts allow for much greater protection of assets, which can be important when a family member has a gambling or drug problem, or for health care planning such as Medicare/Medicaid.
A less common reason for selecting a trust now is taxation. In years past, the estate tax kicked in at a much lower amount than in 2017, where the estate and gift tax exemption is $5.49 million dollars for an individual, or nearly $11 million for a married couple. For individuals or couples with large estates, a trust is almost a necessity to reduce the taxable impact upon the estate.
A number of other factors are necessary for a proper and effective estate plan. If you are considering an estate plan, or wonder if your current estate plan is still effective, please contact Benjamin Long of Schmidt & Long.