Ever wonder whether a will or a trust is the better choice? You’re not alone! It’s a question that has crossed the minds of countless people, and yes, even I lost track after the 10,000th time someone asked me. But fear not, as I’m here to shed some light on this eternal question.
The straightforward yet perhaps not-so-satisfying response to the will vs. trust debate is that it hinges on your unique situation and what you aim to achieve. I know, I know, it might not be the black-and-white answer you were hoping for, but hey, life is full of shades of gray! Ultimately, the decision between a will and a trust is something you’ll need to make based on your own needs and preferences. But don’t worry; I’m here to guide you through the advantages and disadvantages of each option, helping you make an informed decision.
Assets: The Mighty Decider
When it comes to trusts, the assets you own – both in terms of type and amount – play a crucial role. For most folks I work with, the asset lineup typically includes a house, some savings, and perhaps a retirement account. Depending on the type and value of your assets, a trust might offer specific advantages over a will. While many people used trusts in the past to dodge taxes, the current tax rules have shifted, making estate tax planning less of a concern for most.
Different strokes for different folks also apply to trusts. People have varied goals when setting up a trust, and not all trusts are created equal. Despite common misconceptions, a trust isn’t a magical cure-all for every problem or concern. In this blog, I’ll aim to debunk some of these misconceptions.
Your Assets May Dictate What You Can (or Should) Do
For those with a more straightforward asset portfolio, a will might suffice for transferring assets. Most people I encounter have a standard asset setup – they’ve toiled away, paid off a home, accumulated some savings or investments, possibly have life insurance, and likely stashed money in a retirement plan. Using just a will means the estate goes through probate, and some folks prefer avoiding this process. Various methods, including trusts, can be employed to steer clear of probate, but a trust isn’t the only path.
Retirement plans often come with beneficiary designations that transfer assets outside of probate. Life insurance policies also have beneficiary designations, enabling payouts to bypass probate. Even a house can sidestep probate through a beneficiary’s deed. While not everyone feels the need to dodge probate, those who do can certainly use a trust. If you have assets in different states and want to avoid probate in all of them, a trust is your ally. It can also streamline things for your survivors by consolidating all assets in one spot. The key is aligning your assets with your goals.
Trusts: Not the Tax Savior You Think
A common refrain I hear is, “I want to set up a trust to avoid taxes.” This sentiment often harks back to a time when estate taxes had significantly lower limits. Over a decade ago, the estate tax limit was a mere $1,000,000. Back then, the strategy involved splitting a couple’s assets into two separate trusts, each staying below the estate tax limit. However, the current estate tax limit is $11,700,000 per person or $23,400,000 per couple – not a concern for most. While trusts have various uses, saving money on taxes isn’t a top priority for the average person. A will may have similar tax consequences to a trust.
Certainly, certain types of trusts offer tax advantages, but these are more relevant to the wealthy. For the majority of us with a standard asset pool, income taxes take precedence over estate taxes. The SECURE Act, passed in December 2019, altered the rules for passing on retirement accounts after death. With this change, retirement accounts need to be paid out over 10 years, impacting tax planning. If you’re considering using a trust, careful planning is essential to keep tax rates as low as possible. For personalized guidance on such matters, it’s wise to consult an estate planning attorney.
Different Types of Trusts Accomplish Different Goals
Now, let’s tackle a common misconception. Many folks claim they’re all set with their estate plan because they’ve established a trust, believing their assets are shielded from creditors, including future medical expenses. Upon closer inspection, these trusts often turn out to be revocable trusts. Under Texas law, a revocable trust doesn’t provide protection from creditors or future medical costs. To achieve asset protection, you’d need an asset protection trust – typically an irrevocable trust that severs your control over the assets. This specialized trust comes with its own set of pros and cons.
To gain asset protection, you often have to relinquish control over your assets – often placing them in the hands of your children or another trusted individual. Asset protection is only possible when a debt doesn’t yet exist or the event leading to a debt hasn’t occurred. You can’t transfer assets into an asset protection trust expecting protection from existing creditors. Regarding future medical expenses, especially those covered by Medicaid, there’s usually a 5-year lookback period. Assets moved out of your name less than 5 years before applying for Medicaid may count against you, resulting in a penalty period. Timing is crucial when establishing this type of trust, making it more suitable for later stages in life, after homes are paid off, and direct asset control becomes less critical. These specialized trusts require the expertise of an experienced estate planning attorney, and the protection they offer is unavailable if you merely opt for a will or a revocable trust.
Finding The Right Fit For You
You might not be in a situation where an asset protection trust is necessary, and that’s perfectly okay – no need to set one up or pay for one if you don’t need it! Tax concerns might not be as pressing as you initially thought. While we all aim to minimize taxes, a trust may or may not be the solution in such scenarios. Your assets and intentions with them play a crucial role in determining whether a will or a trust is the right fit. The decision is ultimately yours to make, but fear not, as I’m here to walk you through the pros and cons of each approach. If you’d like to discuss your unique situation and figure out whether a will or a trust is right for you, you can schedule an appointment by clicking below.
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