The Pros & Cons of Wills & Trusts
Do you need a Will or a Trust? Not only is understanding the plan you put in place vital, but it’s also important to understand the pros and cons between a Will and a Trust so you can make the best decision for you and your loved ones. Many people are surprised by the differences and realize that their previous perceptions of what a will is or what a trust is are not correct.
Defining a Will. This is also called a Last Will or a Last Will and Testament. A Will is a legal document that enables you to provide instructions about how your assets are to be directed after your death. You can change or revoke your Will at any time (prior to death) and can use the documents to name heirs and to provide guardians for minor children.
Defining a Trust. The Trust is more complex (but actually easier to administer). Trusts are used to transfer assets from one person to another and can be set up to save on taxes (or eliminate taxes) and provide asset protection. With Revocable Trusts, you can be your own trustee and the beneficiary (you are still in charge). While Irrevocable Trusts take you out of the driver seat, but they provide superior asset protection in the event of divorce, creditor claims, tax protection, lawsuits, and nursing home expenses.
Pros of a Will:
- You can nominate someone to be in charge of distributing your assets at your death.
- You can choose who gets what.
- The Court will monitor the Probate to ensure everything goes according to your wishes and all of your creditors are paid (depending on your wishes, this may be a pro or a con).
Cons of a Will:
- No Protection from Probate. If you have a Will, you will go through the court-administered Probate process for any assets controlled by your Will.
- Not All of Your Assets are Controlled by Your Will. This often results in beneficiaries getting “unintentionally” left out and creates disputes among the family at a time when they are already grieving a loss.
- Direct Distributions. The distributions are made directly to the beneficiary, even if they aren’t ready to receive the assets. For example, do you want a beneficiary to receive distributions over several years and not receive one lump sum (think of a young adult in your life that isn’t able to manage money just yet, or a loved one with a disability, or a child)? Direct lump sum distributions can create more chaos than intended.
- No Estate Tax Protection. No Tax Efficiency. Estate Taxes and Capital Gains Taxes are NOT cheap. A basic Will does not help your spouse or your loved ones avoid these expensive taxes.
- Not Flexible. A Will is less flexible and needs to be reviewed (and redone) more often. They also only control the property in the state you live in. If you own property in more than 1 state, then a Will is not for you.
Pros of Trusts:
- Private. Trusts are administered Privately – NO PROBATE required. Your successor can manage the estate immediately and doesn’t need to wait to be appointed by the Court.
- Protects Your Beneficiaries. There are different types of Trusts, so if you work with a good estate planning attorney, they can draft your Trust to fit your unique situation and your specific needs. For example, there are Special Needs Trusts that can be used to care for disabled heirs who cannot afford to have their government benefits at risk by receiving a large lump sum of money. Or a Nursing Home Protection Trust that allows you to “save” your assets from the Nursing Home while still providing you an income source.
- Flexible. Trusts are Flexible and can be set up as joint plan (yes, you and your spouse can share 1 Trust). Trusts can also hold property that is located ANYWHERE. Giving you more protection if you plan on moving or retiring in a different state.
- Tax Efficient. Trusts allow you the ability to build in tax efficiency to help ensure Uncle Sam doesn’t become a beneficiary.
- You Have More Control. With a Trust you can control how your assets are distributed after your death. This means that you can protect assets from going to a beneficiary who is in the middle of a Divorce or a Lawsuit. You can ensure minor children are cared for until an age past 18 (very few 18-year-olds can properly manage a lump sum of money). You can also ensure your spouse’s new spouse doesn’t inherit your assets over your children (this happens a lot more than you think).
Cons of a Living Trust:
- Trusts cost a little more to set up (not as much more as you think).
- Trusts need to be maintained properly in order to be useful—this means you have to ensure your assets are titled pursuant to your attorney’s recommendations (it’s actually an easy process and saves time and headache for your successor!). Mistakes can be costly, especially if you fail to fund your Trust properly.
Knowing whether a Will or a Trust is right for you takes more than reading a Pro and Con list. It can feel overwhelming to know which is right for you and develop the strategy you need to properly protect yourself and your loved ones. This is where we come into play. We can sit down and discuss your goals and help point you in the right direction. If you want to have your plan reviewed or need to set it up, give us a call at 605-777-1772 or email us at info@HarrisLawCo.com to set up your initial no cost meeting. Let us help you make it easy for you and your loved ones.
*This blog is for general informational purposes and is not intended to give legal advice. Please consult with an attorney about your situation.