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Equity Financial Group | Investments | Estate Planning | Insurance

Is A Trust Necessary If I Have A Will?



Is A Trust Necessary If I Have A Will?

A will is a legal document that spells out how you want your property to be handled after you pass away. Additionally, it enables you to designate guardians for any minor children as well as an executor who would be in charge of carrying out your final desires. Even though a will can be used to leave property to your heirs, it might not be the best way to do it. In contrast, a trust is a formal agreement wherein a person or group (the trustee) maintains and oversees assets on behalf of a beneficiary. Trusts can be irrevocable, which means they cannot be modified after they are established, or revocable, which means they can be amended or dissolved while the grantor is still alive. 

Many people opt to use a revocable living trust as a means of effectively transferring their assets to their heirs, including those who are not incredibly rich. Trusts, however, are a crucial estate planning tool that some people may ignore due to certain common misconceptions about them.


What Exactly Is Probate?

A deceased person's assets are distributed by a court through the legal process of probate, in accordance with their will or, in the absence of a will, state law. However, it is conceivable for a will to be contested and for the final distribution of assets to differ from what was specified in the will. During probate, the court will use the will as a guide to help make judgments regarding the distribution of assets.

There are some assets that are exempt from probate and won't go through this procedure.For instance, if you have designated beneficiaries for your life insurance policies or retirement accounts, these assets will normally be transferred to those individuals without going through the probate process. Similar to this, assets may avoid probate if you have set up a payable on death (POD) or transfer on death (TOD) on your bank account, or if you own them jointly with rights of survivorship, as community property, or as tenancy by the entirety.

However, assets that are not transferred immediately to your spouse or heirs due to beneficiary designations or joint ownership may need to go through the probate process. Bank accounts, brokerage accounts, real estate, automobiles, works of art, and ownership stakes in privately owned businesses are just a few examples. Before they can be given to your heirs in accordance with your will or at the court's discretion, all of these probate assets must be divided through the probate procedure. Because probate may be a time-consuming and expensive process, many people strive to avoid it.


A Revocable Trust Can Help Solve Many of These Problems

Using a revocable living trust rather than a will can help you bypass the probate procedure and guarantee that your assets are allocated in the manner you want them to be following your passing. You change the ownership of your property from your individual name to the name of the trust when you create a revocable living trust. The assets will be given immediately to your heirs in accordance with the terms of the trust documents because the trust owns them, preventing them from going through probate.

A revocable living trust not only avoids probate but also gives you control over your assets even after your death.The management and distribution of your assets can be specified in the trust paperwork, and you can appoint a dependable person to serve as the trustee to carry out your instructions. You can make sure that your assets are managed in accordance with your preferences long after you are no longer able to do it yourself by utilizing a revocable living trust.

Here are a couple of methods for using a trust to keep hold of and safeguard assets after death:

  • Say you are married and have two children in their early 20’s, and a $1.2 million non-qualified retirement account, it may be wise to look at putting the retirement account into a revocable living trust. This gives you the ability to direct how the account is distributed after your death. If your spouse is no longer alive, you could specify that the account be given to your children first and then to your spouse. You could also choose to give your children equal shares of the account when they reach certain ages, such as 25 and 35. You could also delegate authority to the trustee to make additional withdrawals from the account for specific purposes, such as paying for a wedding or education. It is entirely up to you how to structure the distribution of the account.


  • If, in addition to the two adult children stated in the preceding example, you have older children from prior marriages, you may want to consider creating a trust to ensure that all of your loved ones are taken care of after your death. You may not want to give your spouse complete control of the brokerage account, worrying that your children from your previous marriage may not receive an inheritance, depending on your preferences and the dynamics of your family. In this case, a trust might allow you to define how the money should be dispersed and ensure that all of your children are taken care of.


Trusts Can Provide Tax Planning Opportunities

Assets maintained in a revocable trust remain under your control and are taxed in the same way as if they were possessed outside of the trust during your lifetime. Certain assets, however, may be eligible for a step-up in basis upon your death, even if they are held in a revocable trust at the time of your death.

Estate taxes can also be reduced through trust arrangement. In 2020, the federal estate tax exemption is $23.16 million, and it is transferrable between spouses. Some states, like Massachusetts, levy estate taxes with smaller exemptions. The exemption in Massachusetts is presently $1 million and is not transferable between couples.

To take advantage of the estate tax exemption and reduce the amount of tax owed, it may be possible to use a credit shelter trust or a marital trust. For example, upon the death of the first spouse, assets up to the exemption amount (using $1M as an example) could be transferred to a credit shelter trust, while any remaining assets could be transferred to another trust, such as a family trust. If the surviving spouse later passes away, the assets in the credit shelter trust may not be included in the taxable estate, which could reduce or eliminate estate taxes at the state level, provided the remaining gross estate is $1M or less.


Final Thoughts on Trusts

A trust can be a powerful tool for achieving a variety of goals both during your lifetime and after your death. However, it is important to periodically review your trust and estate plan with your estate planning specialist or lawyer to make sure it is still aligned with your current situation, goals, and laws. Legislative changes, such as the recent passing of the SECURE Act, may require you to revise your plan. While it may take some additional upfront effort and cost to set up and fund a trust, many investors find that the benefits to themselves and their loved ones are well worth it.



Disclosure: It is important to note that the information provided in this article is intended to be a general overview of some of the financial planning considerations related to trusts, and is not intended to be personalized legal or tax advice.This information should not be construed as legal or tax advice.