Published on: 12/11/2023
Who Needs a Trust Instead of a Will?
Life’s complexities often translate directly into financial complexities, particularly for high-earning families. With substantial assets and intricate and constantly changing tax laws, the estate planning puzzle can become even more elaborate. That complexity is then increased by having to choose from the numerous estate planning tools you can use to pass your wealth on to the next generation, each with its own pros and cons.
One of the most common questions people have about estate planning is whether they need a living trust vs a will. So, who needs a trust instead of a will? The simple answer is that it often depends on your specific circumstances, but that generally, for high-net-worth families, a trust can offer more control, flexibility, and privacy than a traditional will.
Living trust vs. will: What’s the difference?
There are a few different types of trusts you can use as estate planning tools, including living trusts, irrevocable trusts, and testamentary trusts. For the purpose of this specific discussion, we will focus on living trusts vs. wills.
A will is a legal document that outlines your wishes for how your assets should be distributed after you pass away. It also names an executor to handle the distribution process and appoints guardians for any minor children you may have. Wills are generally subject to probate, which is a court-supervised process for settling an estate and ensuring that the will’s instructions are followed.
On the other hand, a living trust, also known as a revocable trust or an inter vivos trust, is created during your lifetime and can be modified or revoked at any time. It holds your assets while you’re alive and can provide instructions for how your assets should be managed and distributed after you pass away. One of the most significant advantages of a living trust is that it allows your estate to avoid the probate process, saving time, money, and potential conflicts.
Why should you have a trust rather than a will?
Determining whether you need a trust or a will often hinges on the specifics of your financial situation, the complexity of your estate, your age, and your privacy concerns. Generally, if your estate is worth more than the federal estate tax exemption amount (currently $12.92 million as of 2023), a trust may be worth consideration as it could help avoid significant estate taxes.
1. Complexity of your estate
A living trust can streamline the management of these assets upon your death if you own multiple properties*, have business ownership stakes, or have multiple retirement or investment accounts. By transferring these assets into a living trust during your lifetime, you plan for a smoother transition of property upon your death without the need for probate.
This avoids the complications and delays associated with probate courts. Furthermore, a living trust can be structured to deal with complex scenarios, such as providing ongoing income to a beneficiary, which can offer more nuanced control over how your estate is managed and distributed.
*Continue reading about the costs of transferring property into a trust.
Living trusts offer an enhanced degree of privacy compared to wills, which is particularly valuable for individuals who wish to keep their financial affairs private.
Unlike a will, a living trust is not made public upon your death. Wills must go through the probate process, which includes filing the will with the probate court, making it a public document that anyone can access. This means that the details of your estate, including what you owned and who you owed, become part of the public record.
On the contrary, a living trust does not go through probate and its details remain private. This ensures that the distribution of your assets happens discreetly and only the beneficiaries of the trust are privy to its specifics. The privacy offered by living trusts can also reduce the likelihood of a successful legal challenge to the distribution of your assets.
3. Your health status
If you’re experiencing declining health or are of an advanced age, a living trust can provide a considerable advantage. This is particularly true if there’s a possibility you might become unable to manage your own financial affairs.
In such situations, the trustee or a successor trustee you’ve appointed can step in and manage the assets held in trust on your behalf. This plans for a seamless transition of management without the need for court intervention, unlike a power of attorney which may face more scrutiny and potential legal complications.
Additionally, in case of your incapacity, your assets in the trust can be used for your benefit, without requiring a conservatorship. By planning ahead, you can be assured that you and your finances will be taken care of in the event of any unforeseen health complications.
4. Potential for disputes
When it comes to distributing your assets, there is always a possibility of disputes arising among family members or other beneficiaries, particularly if you are passing down a family business. These disagreements can lead to lengthy legal battles, potential rifts within the family, and even the misappropriation of your assets.
Due to its more private nature, a living trust may reduce the potential for disputes by clearly outlining your wishes and limiting access to your estate’s details. Additionally, a living trust allows you to appoint a professional trustee who can impartially manage and distribute assets, avoiding any personal biases or conflicts within the family.
What are the disadvantages of a trust vs a will?
While living trusts have significant advantages, setting up a trust to protect assets can also come with some potential disadvantages compared to wills. These include:
- Cost: Creating a living trust can be more expensive than drafting a will, as it often involves transferring assets into the trust and ongoing maintenance fees.
- More complex to create: Unlike a will, which can be easily created by an individual, a living trust often requires the assistance of a lawyer and can involve more paperwork.
- Limited control over assets: Once assets are transferred into a living trust, they technically belong to the trust rather than you as an individual. This means you may have less control over how they are managed and distributed compared to assets held in your own name.
- May not fully avoid probate: In some cases, a living trust may still need to go through the probate process, depending on state laws or if certain assets were not properly transferred into the trust. However, even in these situations, the probate process may be significantly simplified and expedited compared to a will.
In other words, if your estate planning process is relatively straightforward, a will might be sufficient. A will can also be more appropriate than a trust if your primary concern is nominating guardians for your minor children. However, you should always consult with a financial advisor and an estate planning attorney to determine the best choice for your unique circumstances.
What assets should not be in a trust?
While a living trust can hold most of your assets, there are certain types of assets that should not be transferred into a trust. These include:
- Retirement accounts: Qualified retirement accounts such as IRAs and 401(k)s should not be transferred into a living trust. Doing so could result in significant tax consequences, as well as penalty fees for early withdrawals.
- Life insurance policies: Life insurance policies should not be transferred into a living trust as they are considered separate entities from your estate and typically have designated beneficiaries. However, you can name the trust as a beneficiary of the policy to plan for proper distribution according to your wishes.
- Tangible personal property: Personal items such as jewelry, artwork, and furniture may not need to be transferred into a living trust. You can simply leave these items to specific beneficiaries in your will or create a separate document outlining their distribution.
- Joint tenancy property: Assets held in joint tenancy with the right of survivorship automatically transfer to the surviving owner upon one owner’s death and do not go through probate. Therefore, there is no need to transfer these assets into a living trust.
It’s important to review and update your trust regularly to make sure that all necessary assets are properly titled in the trust. Your financial advisor and estate planning attorney can help you determine which assets should be included in your trust to best achieve your goals and help protect your legacy.
Looking to secure your wealth for the next generation? Let’s talk.
So, who needs a trust instead of a will? As with any estate planning solution, the choice between a trust or a will ultimately depends on your specific circumstances and goals.
While trusts can offer significant benefits in terms of privacy, control, and avoiding complications, they can also come with some potential drawbacks. It’s important to carefully consider these factors and consult with a financial professional to determine the best approach for protecting your assets and securing your legacy for future generations.
If you’re ready to start planning for your family’s financial future, Avidian Wealth Solutions is a high-net-worth wealth management firm offering estate planning wealth solutions in Houston, Austin, Sugar Land, and The Woodlands.
Whether you’re looking for the best way to transfer a family business or put plans in place that work to protect your assets from taxation, our experienced team can help you navigate the complex world of estate planning and offer tailored solutions to meet your unique needs.
Schedule a conversation with us today and start working towards securing your wealth for generations to come.
More Helpful Articles by Avidian Wealth Solutions:
- What is the Repatriation Tax in the US?
- Will AI Replace Financial Advisors?
- What is an Exit Plan (and Why Does it Matter?)
- What to Know About the Great Wealth Transfer
- How Is Passive Income Taxed?
Please read important disclosures here
Get Avidian's free market report in your inbox
Schedule a conversation
Curious about where you stand today? Schedule a meeting with our team and put your portfolio to the test.*