06/18/2014

Will or Trust? How to Decide Which is Better for Your Situation?

A Revocable Trust, also called a Living Trust, is a legal document that an individual or married couple creates to hold and own individually owned assets.  The maker of the trust is called a Grantor.  The manager of the trust is called the Trustee who invests and spends for the benefit of the Grantor as the Beneficiary of the trust. In most cases, the Grantor will also be the Trustee, although some individuals may choose to have an institution manage their trust property.

A Revocable Living Trust covers three phases of the Grantor's life - while the Grantor is alive and well, if the Grantor becomes mentally incapacitated, and after the Grantor dies.

The Grantor is Alive and Well

While the Grantor is alive and well, the trust agreement will have specific provisions allowing the Grantor to manage, invest, and spend the trust assets for his or her own benefit. Thus, the Grantor will go about business as usual with regard to assets that have been funded into the trust, except that the Grantor will sign as the "Trustee" instead of as an individual. The Grantor will also be able to use his or her own Social Security Number as the taxpayer identification number for the trust and file income taxes as always on IRS form 1040.

The Grantor Becomes Mentally Incapacitated

The trust agreement will also specify one or more procedures to be followed if the Grantor becomes mentally incapacitated. If the Grantor is determined to be mentally incompetent and can no longer properly serve as Trustee, then the trust agreement will name a successor Trustee to take over the management and investment of the trust funds from the Grantor. The Disability Trustee will then be able to take care of and manage all of the Grantor's finances (assuming all of the Grantor's assets have been funded into the trust) and pay the Grantor's bills.

The Grantor Dies

When the Grantor dies, the successor Trustee will be able to step in and pay the Grantor's final bills, debts, and taxes. The trust agreement will then contain instructions about who will receive the balance of the trust funds after all of the bills have been paid, and the Trustee will distribute the balance accordingly, including to continue serving as Trustee if the trust instruction includes a continuing trust for beneficiaries.

How a Revocable Living Trust Avoids Probate

Since the assets funded into a Revocable Living Trust during the Grantor's lifetime will no longer be owned by the Grantor but by the Trustee of the trust, there will be no need for the trust assets to be probated when the Grantor dies. Instead, the Trustee can proceed with settling the trust outside of probate and without any court supervision or interference.

 Here are some factors to consider when assessing your need for a will versus a Revocable Living Trust.

Wills vs. Trusts - Planning for Mental Disability

Regardless of your net worth, and particularly if any of your assets are titled in your sole name, then you should consider a Revocable Living Trust for mental disability planning. A well drafted Revocable Living Trust should contain provisions for determining your mental capacity outside of a court proceeding as well as how to take care of you and your finances if you do become mentally incapacitated. This will save you and your family thousands of dollars by keeping you and your assets outside of a court-supervised guardianship or conservatorship.

Wills vs. Trusts - Estate Planning for Minor Beneficiaries

If a minor child inherits an insurance policy or a retirement account, the funds will be placed in a court-supervised guardianship or conservatorhip for the benefit of the minor until the child reaches 18. Thus, in these situations, the parents should consider setting up a Revocable Living Trust and naming the trust as the primary or contingent beneficiary of the life insurance or retirement account. That way the successor Trustee will have the legal authority to accept the funds instead of a court-supervised guardian. In addition, the parent can dictate in the trust agreement the age at which the child will receive their inheritance instead of at 18, the legal age of majority.

Wills vs. Trusts - Keeping Your Estate Plan Private

A last will and testament that is filed with the probate court becomes a public court record that anyone can read. Contrast this with a Revocable Living Trust, which is a private contract between you as the Grantor and you as the Trustee. Unless your beneficiaries have to go to court over something in your Revocable Living Trust agreement, the document should remain a private document that only the trustees and certain beneficiaries will be able to read after your incapacity or death.

Wills vs. Trusts - Estate Planning for Real Estate Located Outside of Your State

If you own real estate in more than one state or outside of your home state, then you'll benefit from establishing a Revocable Living Trust and putting the property into the trust. Otherwise, your family may be faced with two separate probate estates - one in the state where you live, and a second in the state where your real estate is located, which is referred to as "ancillary probate."

Be sure to fund your assets into your trust and update your beneficiary designations, otherwise your trust won't be worth the money you spent on it.

Law Office of Eileen Guerin Swicker