Episode 304: Wills and Trusts: Advantages and Considerations

Episode 304: Wills and Trusts: Advantages and Considerations

Passing on property is anything but simple. Because of this, estate planning is an active field of law. The more property there is to pass on, the more complicated the process gets.

If the process isn’t properly managed, family members may not receive the assets reserved for them. If estate planning isn’t effectively managed, there could be significant delays, unforeseen taxes burdens, or privacy issues.

Legally recognized documentation is the primary tool through which estate owners can name beneficiaries, allocate assets, and ensure their final wishes are carried out. As such, wills and trusts are valuable elements of estate planning that can provide certainty and peace of mind.

To fully leverage the power of wills and trusts, it’s recommended that estate owners work with an experienced estate planning attorney and accountant. Depending on the exact circumstances involved, wills, trusts and other estate planning tools can be a challenge to set up properly. An expert accountant or attorney can ensure the estate owner’s wishes are accurately communicated through all estate planning initiatives.

Will and Trusts: A General Overview

Wills and trusts are used for the same general purpose – to ensure the right people receive the right assets when an estate owner passes away. How they go about this purpose is different, and those differences may dictate which approach – will or trust – makes the most sense for a particular estate holder.

Here’s a brief look at each:

  • Wills – Wills are legally recognized documents submitted to the court when the benefactor dies. The court then has jurisdiction over the will and may make legally binding decisions based off its interpretation of the document.

    Wills can resolve many of the concerns left behind by an estate owner’s death. They are used to name an executor – the person responsible for overseeing the will’s execution – along with naming beneficiaries, allocating estate assets, naming who will care for dependents, specify funeral preferences, and a few other important considerations.

  • Trusts – You can think of trusts like asset containers. They come in a variety of arrangements, but they’re all used to secure a variety of assets for a named beneficiary.

    Trusts can be complicated to set up, but they offer a couple of benefits that wills do not. We’ll go over a few common types of trusts later, as there isn’t a single best option for every estate owner.

Do Wills or Trusts Make More Sense for Texas Estate Owners?

The primary advantage that trusts offer is their probate-free nature. Probate is the court-mandated and court-guided legal process during which an estate’s assets are allocated to beneficiaries. In some states, probate can be a time-consuming, tax-heavy process that estate owners are encouraged to avoid, if at all possible.

In Texas, probate tends to be less burdensome than it is in most other states. For this reason, wills are a perfectly reasonable estate planning vehicle, even if it must pass through probate first. Further, wills are much simpler to set up than a trust, and a simple document may be all that’s required.

For high-value estates, a trust can provide a shield against estate taxes. Though these taxes don’t kick in until an estate is valued at more than $12 million, for estates that exceed this threshold, a trust can offset considerable tax liabilities.

Privacy is another factor that is often overlooked – probate is a matter of public record. For some families, especially those where inheritances may cause conflict, avoiding probate and public scrutiny may be a reason a trust is preferred over a will.

Intervivos vs Testamentary Trust – What’s the Difference?

There are several types of trusts that can be arranged for estate planning purposes. Intervivos and testamentary trusts are two examples. Here is a summary of each:

  • Intervivos trusts – An intervivos trust is another term for a living trust. As the name suggests, intervivos trusts are created while the benefactor is still alive, which offers a few benefits. For one, intervivos trusts are the only trusts that avoid probate. Secondly, the assets used to fund a living trust can still be accessed and utilized by the benefactor. Once the trust’s owner passes away, a new trustee may be named through the benefactor’s will or through court appointment.

    An important note is that a living trust isn’t officially formed until it’s funded. Any assets not protected by the trust upon death (including assets designated to be put in the trust through a will) must pass through probate.

    Intervivos trusts may be revocable or irrevocable – more on that in a bit.

  • Testamentary trusts – Testamentary trusts are trusts that are established through a will. In other words, they do not exist before the benefactor’s death. Testamentary trusts do not avoid probate, but they do allow people to easily assign instructions with the trust’s assets. For example, with a testamentary trust, benefactors can specify that the beneficiary must be of a certain age before they may receive the trust’s assets.

    Testamentary trusts can also be modified while the benefactor is still alive, so flexibility is retained. Finally, testamentary trusts can be paid for through the estate’s assets, so they’re a low-cost option, compared to intervivos trusts.

Revocable and Irrevocable Trusts: A Quick Comparison

In addition to living and testamentary trusts, there are also revocable and irrevocable trusts to consider. Both are types of living trusts that sidestep probate – and that’s where the similarities end. Here’s a more detailed breakdown of each:

  • Revocable trusts – Revocable trusts are termed such because they can be modified after the trust documentation is submitted. That means the trust’s owner can change beneficiaries and the controlling trustee as desired. It also means the trust’s owner can access, add, or remove assets placed in the trust.

    There are some downsides with this flexibility, though. One, revocable trusts do not shelter assets from taxation. Income derived from a revocable trust is taxable, and those assets are also subjected to estate taxes following death. Another complication with revocable trusts is that they are not protected from lawsuits or other liabilities if they are levied against the trust’s owner. For individuals in professionals where legal liability is a concern – physicians, accountants, real estate agents – a revocable trust will not protect assets.

  • Irrevocable trusts – An irrevocable trust cannot be modified once the paperwork is submitted, except in extremely rare circumstances. At the minimum, the trust’s creator (if available), all named beneficiaries (both present and future) and the court must all approve any changes to the trust. It’s best to think of irrevocable trusts as set in stone, as once assets are placed in an irrevocable trust, the benefactor gives up all rights to those assets.

    The upside with irrevocable trusts is that the assets contained within are not subjected to estate taxes. Also, irrevocable trusts provide a durable shield against liability and creditors, which ensures beneficiaries receive the assets they are promised.

Estate Planning is Complex and the Stakes are High, so Consider Partnering with a Estate Planning Attorney

Ultimately, there isn’t a single best estate planning solution for every estate. The size of the estate, the assets it contains, the number and nature of beneficiaries, the relationship the benefactor has with beneficiaries, the need for privacy, and many other factors will determine which estate planning tools make the most sense.

The challenge is sorting through all of those estate planning options and determining which ones are the best fit. An estate planning attorney or accountant can provide valuable insight here, guiding their clients through the process and ensuring their client’s final wishes are prioritized following their death.