Putting together a well-thought-out estate plan is a necessary step to protecting the ones closest to you after you’re gone. It also ensures that all of your wishes are carried out the way you want. Many people put it off to avoid the potentially complex conversation, but once it’s complete, it gives you peace of mind knowing that you’ve put thought and action into making things easier for people you care about.
One of the very first steps you’ll want to consider in your estate plan is understanding the differences between a will and a trust. These legal documents allow you to choose the ways in which your legacy will live on, but they each have a different set of rules depending on what you’re trying to accomplish.
To start off, the timing for each is different. A will goes into effect directly after the testator dies and names a legal representative to execute defined terms. (The testator is the person who has made a will or given a legacy.) On the other hand, a living trust goes into effect the moment it’s signed. There are two types of living trusts: revocable and irrevocable.
A revocable trust is flexible, allowing the grantor (the person who creates the trust and owns the assets) to adjust its terms throughout his or her lifetime. The grantor typically acts as the trustee during this time and can move assets in and out of the trust or even change the terms as often as he or she would like. For example, a grantor can change the beneficiary of the trust’s assets from person to person or even from charity to charity.
Since the grantor still owns the property held in the trust account, it may be subject to federal estate tax, and there’s always the potential to lose them to lawsuits or creditors. Depending on your situation, some taxpayers decide that an irrevocable trust may be better suited for their needs.
An irrevocable trust is also a legal arrangement created during the grantor’s lifetime, but in this case, once a beneficiary has been named, the ownership is immediately transferred. This means that the grantor no longer owns the asset and is unable to make changes to the trust during his or her lifetime or upon passing. However, you can include specifications, such as the timing and purpose of the asset. For example, the asset could be made available to a child at 18 years of age for education only.
For tax purposes, since the ownership is immediately transferred, an irrevocable trust provides an alternative to gifting an asset to a beneficiary in order to reduce the taxable estate. Depending on your situation, you may be subject to gift tax upon transfer of the property.
Unlike wills, trusts are private records and do not have to go through probate, which is a public process. While this usually allows your beneficiaries to avoid probate, court costs, and estate taxes, trusts typically are taxed at a higher rate than income tax.
A will is a public document, thus subject to probate upon passing. A will may contain similar elements as a trust, such as property, investments, etc., but a will is where you would identify guardianship for your children, outline funeral wishes, and name individuals who oversee end of life preferences. This document is where you would identify a person to make decisions for you in the event that you’re unable to make them yourself.
Depending on your situation, it may be wise to implement both a will and a trust depending on the purpose you’d like them to serve. There are a number of personal and financial decisions that go into each document and each one has the ability to function differently.
In most cases, state law often oversees these documents, so it is important to understand both federal and state law as it pertains to your location.
Estate planning is a necessary and sometimes challenging process that is best accomplished with the help of an advisor to walk you through each step and assist you with the process. Please contact me at stu@eaglerockwealth.net to further discuss the tax implications of your decisions and identify where opportunity exists for you and your loved ones.
Stu Steinberg, CPA, MBA has been working with families and their money situations since 1988. He can be reached at 61 Water Street, #2, Newburyport, MA 01950 and at (978)864-9581 and stu@eaglerockwealth.net.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. This information is not intended to be a substitute for specific individualized tax or legal advice. Eaglerock Financial, Inc., Stu Steinberg and LPL Financial do not provide tax or legal advice or services. Please consult your tax or legal advisor regarding your specific situation.
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