Wills vs. Trusts
Eileen St. Pierre, The Everyday Financial Planner
One of my most memorable Estate Planning workshops occurred four years ago in Lawton, OK – home of Fort Sill. In my large group, the most outspoken was a retired JAG who strongly advocated the use of do-it-yourself revocable trusts instead of wills. Most of us, however, are not trained lawyers so this subject can be really confusing. Almost all the people I’ve talked to say they would consult an attorney, not try to do this process themselves. They just want to be more informed before they go see an attorney. So here are the basics on wills, trusts, and when to use them.
A will is not just a document that lets you tell the world whom you want to get your assets. A will allows you to name an executor or personal representative who will carry out your wishes.
- A will is vital for people with young children. It is in a will that you will state who will become guardians of your minor children. A judge will give the people you name priority over anyone else, but he/she will still investigate whether this person will be a good choice. Make sure you discuss this with the potential guardian(s) before you write your will. You also need to decide if and when you should tell your children about this decision. You are free to change guardians later on if, say, your chosen guardian gets remarried and moves to a different state.
- Most wills are called attested wills. This is a will that is witnessed and attested to by at least two witnesses and signed by you in their presence. You can also write a holographic will. This is a will that is written and signed in your own handwriting. There is no witness requirement, but your handwriting must be verified. Under current Oklahoma law, oral and video-only wills are invalid.
- At the start of your estate planning process, it is a good idea to sit down and complete a Family Inventory (see my Wills and Trusts Fact Sheet). This inventory should state what the asset/property is, where it is located, who owns it, how much is it worth, and how to access it. This includes listing account numbers, usernames and passwords.
- Your will must go through the probate process to be considered legally valid. Probate is the legal process through which your property is properly transferred to other parties. My next column will discuss probate in more detail.
One way to leave assets to others outside of your will is to use a trust. A trust is a legal agreement between two parties, the grantor (you) and the trustee (the manager of the trust), for the benefit of a third party known as the beneficiary. There are many different types of trusts. Each type has its own advantages and disadvantages, so you should discuss them thoroughly with your estate attorney before setting one up.
One way to classify a trust is as revocable or irrevocable. A revocable trust can be changed or revoked by you at any time, provided that you are not mentally incapacitated; it is sometimes referred to as a living trust. With an irrevocable trust, the terms of the trust cannot be changed until the terms or purposes of the trust have been completed. As with any trust, you may still need what is called a pour-over will to include any assets or property that are not included in the trust.
A revocable trust is one of the most frequently used estate planning tools. Some people call it a will substitute. Revocable trusts share the following characteristics:
- You retain the right to change or cancel the trust agreement at any time before your death. This also means that you retain control of the assets in the trust (you have beneficial interest).
- While you can choose someone else, such as a bank, to be the trustee, most people choose to manage the trust themselves, and then appoint a family member to do so after death.
- You are responsible for reporting the trust’s income on your income tax returns.
- Assets included in this type of trust will be subject to estate tax.
- At the time of your death (or disability), your trust has specific instructions of how to manage and distribute the assets in the trust.
On the other hand, an irrevocable trust is considered an independent legal entity.
- You (the grantor) will need to choose an independent trustee to manage your trust. You will have to pay the trustee a management fee (usually between 0.75% and 1.25% of the assets being managed), unless he/she chooses to not to be compensated.
- The trustee will have to file tax returns on the trust’s behalf. Thus, the income from the trust will not appear on your income tax returns.
- All of the property in the irrevocable trust, plus all future appreciation on the property, is transferred out of your taxable estate. This reduces your ultimate estate tax liability.
- Your property is better protected from creditors than with a revocable living trust.
- You can avoid Medicaid nursing home spend-down provisions by transferring assets out of the estate (but you need to do this at least five years before applying for Medicaid).
- The downside to this type of trust is that you will lose control over the assets in the trust.
Trusts are flexible, varied, and complex. They can be customized to fit your situation. Attorneys charge more for trusts than they do for wills. According to the National Association of Financial and Estate Planning, a basic trust plan may run anywhere from $1,600 to $3,000, or possibly more depending on the complexity of the trust.
Wills vs. Trusts
Here is a basic summary of when to use a will versus a trust along with the main question to consider with each:
|If your estate is small ($150,000 or less in OK), your probate costs will be minimal.||
Avoid probate and publicity.
|Only way to name guardians for minor children.||
Settle estate faster.
|Can be handwritten and easy to attach addendums.||
Can give specific instructions on use of money.
|Likelihood of will being contested?||Does higher cost outweigh these benefits?|
Visit my Estate Planning page for more information.