Will or a Trust: Which is better for your situation?

by Kaamil Khan

Many people have heard of a “will” and a “trust,” but are unsure which estate planning device would be best for them and their needs. Both serve the same general purpose, the distribution of your assets in an organized and efficient manner to your loved ones. However, each document has certain advantages and disadvantages. Keep reading to see the key differences between these two estate planning options and what considerations you should take into account when deciding between the two.

Administrative Effects

A will is only effective upon your passing. This means that whatever gifts you have provided for in your will do not take effect until you have actually passed away. Issues arise when property is left to someone in the will, but is then actually given or sold during the will maker’s lifetime. Such a transaction is an abatement; the property is no longer covered by the distribution scheme of your will.

On the other hand, a revocable living trust is created during your lifetime. As soon as you sign the trust document, it is effective. Therefore, to take full advantage of your trust, you must transfer your property into it such as your personal residence, savings accounts, and other significant assets.

For a trust, you must also designate a “trustee,” the person who will actually manage your trust on your behalf. The trustee becomes the owner of the property for all intensive purposes. Anything that is transferred to the trust will then be overseen by the trustee and require his or her consent to be fully managed. Even if you serve as the trustee of your own revocable living trust, you will be wearing two hats: one as a beneficiary of the trust and the other as a trustee for the remaining or future beneficiaries. Therefore, there are more administrative burdens placed on those who decide to utilize a trust.

The Probate Process

Probate is the process by which the local Circuit Court oversees the distribution of your property to your intended heirs. Every will in Virginia must go through probate. Probate is also considered a public record; an inventory of your assets as well as who receives what property has to be filed with the court.

The primary advantage of a trust is the avoidance of probate. Your assets and the distributions to your heirs will be kept private within the contents of the document, which are never made publically available. Further, as soon as the debts and liabilities of your estate have been satisfied, your property will be immediately transferred to your beneficiaries. Due to the heavy population of the Northern Virginia area, probate and the distribution of your property can take almost six to twelve months before it is finalized. For this factor, the benefits of a trust greatly outweigh that of a will: complete privacy coupled with a much faster distribution of property and overall estate administration costs.

Your Total Net Worth

In Virginia, the probate tax is $1.00 per thousand dollars of probate eligible assets. Therefore, individuals or couples with two to three million dollars in assets may want to consider using a trust to manage their property. A properly administered trust can significantly reduce the property that would pass through the probate process and reduce any probate tax that the estate may owe.

Ownership of Property in Different States

Probate in Virginia only applies to property and real estate located within the state. If you own property outside of Virginia, you must also enter probate in that state. An advantage to using a trust is that this property can be transferred into the trust and therefore avoid probate, and its associated cost, in the other state.

Children from Prior Marriages

For those in a second marriage, a trust can allow for children from a previous marriage to be more fully provided and protected for. For example, if a joint savings account is held by two spouses during their lifetime, the money in this account will be the property of the surviving spouse upon the passing of the first. However, if this same account is held by a trust, then the distribution of this money will be governed by the provisions of that trust.

Even if the spouse who died first had a will, the provisions of his or her will could not govern the distribution of that bank account. Under Virginia law, a bank account is considered a “contractual asset” and falls outside the scope of property capable of being passed through a will.

Another option for a spouse in a second marriage is the Qualified Terminal Interest Property Trust, or QTIP for short. This specific type of trust provides the surviving spouse with the use of and the right to any income produced by the assets left by the first spouse. However, the survivor does not have full ownership of the trust assets. He or she cannot sell them or give them away in his or her own estate planning device. Upon the passing of the second spouse, these assets will actually be distributed according to the QTIP Trust’s provisions.

Reduction of Tax Liability

Unfortunately, while a revocable living trust reduces probate tax liability, a will or a revocable living trust by themselves cannot completely avoid the federal estate tax. If you are fortunate enough to have an individual net worth of $5 million dollars or more, more advanced planning options must be utilized. These measures include use of an Irrevocable Life Insurance Trust, Credit Shelter Trust, a Charitable Remainder Trust, or perhaps even a Family Limited Partnership.

Other Situations

If you have a family member who is disabled or suffering from special needs, a trust is an absolute necessity to provide for this person while not jeopardizing his or her eligibility for disability funding from other sources. For older individuals, a trust may be beneficial as it can allow a trusted person, such as a child, to be designated as trustee and have this person mange the trust’s affairs on your behalf.

Conclusion

There are a variety of factors that must be considered when determining whether your estate would be sufficiently covered and protected by use of either a will or a trust. However, estate planning is not a “one size fits all” approach. Nothing can replace the advice and guidance a professional can provide you with. If you are interested in discussing your particular situation, contact K.M. Khan Law today.

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