A lot of people automatically think that a simple will is the document you should use to pass along your legacy. In fact, there are some drawbacks and limitations when you use a will, so a trust can be a better choice under some circumstances.
In this legal guide, we look provide clarity as we answer the trust versus will question.
If you use a will, the executor would act as the administrator after you are gone. You name the executor when you draw up the will. When the time comes, the executor cannot follow your instructions and distribute the assets independently.
The will would be admitted to probate, and a court supervised proceeding would unfold. It will typically take seven to 18 months for probate to run its course in most jurisdictions. No inheritances are distributed during this interim, so the heirs have to play a waiting game.
There are ongoing administrative expenses along with a filing fee, the executor’s remuneration, appraisal and liquidation charges, and potential accounting and legal fees. These costs add up to between three percent and seven percent of the estate in most cases.
Since probate is a public proceeding, anyone who has an interest can access probate records to pry into the details. This loss of privacy is generally disconcerting, and the information can cause hard feelings among interested parties.
Unless you include a testamentary trust, the inheritances would be distributed in lump sums. This can be a source of concern if you are leaving money to someone who is not a good money manager.
Revocable Living Trust
The most commonly used alternative to a living will is the revocable living trust. As the name would indicate, you retain the right of revocation when you establish this type of trust. You would act as the trustee, so you would have ongoing control of the trust’s assets.
In the trust declaration, you would name a successor trustee to assume the role after your passing. This can be someone you know who is equipped to handle relatively complicated financial and administrative tasks, and you can alternately use a professional fiduciary.
Your heirs would be the beneficiaries of the living trust. You would be able to dictate the terms of the distributions, so you would not have to allow for lump sum payouts all at once.
The trust would become irrevocable after your death, and the principal would be out of the reach of the beneficiaries’ creditors. Distributed assets would be in play, but you can instruct the trustee to mete out limited incremental distributions that can be used relatively quickly.
Probate is not a factor when a living trust is utilized to transfer assets, so all the hassles would be avoided.
There are a few different reasons why an irrevocable trust can be preferable to a will as an asset transfer vehicle. You surrender incidents of ownership when you have this type of trust, which is a fancy way of saying that the assets are no longer in your own name from a legal perspective.
As a result, they would not be counted if you apply for Medicaid to pay for long-term care when you are an elder. You could alternately use an irrevocable trust to provide assistance to someone who is relying on need-based government benefits.
High net worth individuals who are exposed to the federal estate tax use these trusts, and an irrevocable trust can be part of an estate plan for a parent who is getting remarried.
These are a handful of the utilizations, but there are a number of others.
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