No one relishes the thought of the day they pass away and leave all their worldly possessions behind. However, it’s a certainty that no one can avoid. Thankfully, you have options for planning for what happens to your estate, including a will or a family trust.
“Family trusts and wills are both solid estate planning tools that can ensure your assets are protected and will pass to heirs the way you wanted,” said Chuck Czajka, a certified estate planner with Macro Money Concepts in Stuart, Florida.
But which one should you choose? Or should you choose both? Here’s what you need to know about the differences between family trusts and wills (including whether you need both options) to help you avoid estate planning mistakes.
Family Trusts vs. Wills
“Trusts and wills are different means of distributing and controlling your assets after your death — although you can also create and fund a trust while you are alive,” said Mary Kate D’Souza, co-founder and chief legal officer of Gentreo.
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However, there are some key differences.
“Without a will, your state will determine what happens to your estate (everything you owned while alive) in a predetermined order, which may or may not be what you want,” said Matt Sanchez, a private wealth advisor at Biechele Royce Advisors and certified financial planner. “A will allows you to specify whom you want your assets to go to; however, there are limitations. Hollywood perpetuates stories of wills that are read, and a close relative, like a child, is surprised they are left out. The reality is, a will like that will be challenged (making it invalid). This is where a family trust comes in.
“Trusts allow the grantor (the person making the trust) to do just about whatever they want with the assets. The key benefit is that a trust avoids probate, so the assets the beneficiary inherits are not public knowledge. Generally speaking, a trust is something that would be added to an estate plan for a family with $2+ million in assets, so they can keep their estate private. It may also be a great tool if the grantor has very specific wishes and doesn’t want to worry about the possibility of the will being challenged or invalidated. A will is generally appropriate for anyone with less than $1 million in assets.”
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When Should a Family Trust Be Used?
“A family trust is appropriate for persons living in states where probate is especially difficult, those who want to provide for the management of their assets if they become incapacitated, people interested in keeping information about their assets and who inherits those assets private, and those who have a significant number of assets or a large estate,” said Bruce Tannahill, JD, CPA/PFS, CLU, ChFC, AEP, director of estate and business planning with MassMutual.
Here are some other situations in which a family trust would be appropriate to use, according to Shelly Bailey, an estate associate with Truepoint Wealth Counsel in Cincinnati, Ohio.
- For creditor and divorce protection of assets distributed to a beneficiary
- For disabled beneficiaries who need to qualify for government benefits
- For tax-planning options (i.e., if the estate’s assets are large enough to incur significant state and/or federal taxes)
- For cost and time efficiency over the probate process
When Should a Will Be Used?
“Everyone should have a will,” said Josh Sailar, CFP, CFPA, partner at Blue Zone Wealth Advisors. “Wills do, however, leave a lot to be desired if you have a more complex estate or family situation. Aside from what is often the primary pain point of being public record, wills are a somewhat basic way to leave bequests, appoint guardians and an executor … ”
If you have children, a will is something you should strongly consider.
“A last will and testament is more appropriate to use for certain aspects whenever there are minor children that are being planned for,” said Anthony Cetrangelo, Jr., a wills, trusts and estate planning attorney with Henderson Franklin Attorneys at Law. “A will — not a revocable trust — can be used to name guardians to care for a minor child. Depending on the state law, there may be an additional writing that can be used to name a guardian; however, a revocable trust is not that document.”
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Do You Have To Have a Will If You Have a Trust?
“If you have a family trust, you still need a will,” Tannahill said. “Frequently, some assets are not owned by the trust. These may include cars, other personal property, and payments due you at your death (such as a final paycheck and refunds for prepaid expenses). Those assets must go through the probate process. Once that process is complete, the assets are distributed to the family trust and are governed by its provisions. These wills are often called “pour-over wills” because the assets “pour over” to the family trust.”
What Are My Options for Setting Up a Family Trust or Will?
“This completely depends on your situation,” Sailar said. “We work with a lot of estate planning and tax attorneys to appropriately draft these documents considering the complexity of the client’s affairs. So that is what’s necessary in our particular case. However, basic requirements can be handled online now through services like Trust and Will.”
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Last updated: Aug. 27, 2021