Two of the possible ways for people making arrangements for the disposition of their assets after their death are wills and irrevocable trusts. Each one has unique strengths. Here’s how the two compare and contrast so you can determine if one or the other is right for you. Don’t let the intricacies of estate planning keep you from deciding what happens to your assets after you die; work with a financial planner to take the estate planning steps that are best for you.
What is an Irrevocable Trust?
A trust is a legal vehicle where you can place your assets, either to keep there for a period of time or to distribute. The grantor, or creator, of the trust typically uses it to pass on these assets after they die to their beneficiaries. With a trust, there are also applications outside of death. For example, a trust maker might create a trust just in case they become incapacitated.
With this trust, you establish the trustee, or the person with a fiduciary responsibility to manage the trust, your beneficiaries, and transfer your assets. The grantor cannot act as the trustee nor the beneficiary, though. You give up control of your property, funds, etc., when you put them in an irrevocable trust. So, since the assets no longer belong to you, you typically cannot change the trust or its terms.
There are some situations where you can alter an irrevocable trust. However, you must go through the law to do so. The difficulty depends on the state you live in, your beneficiaries, and the assets in the trust.
What Are The Benefits of an Irrevocable Trust?
An irrevocable trust affords you and your loved ones certain protections that other estate planning measures might not. To start, a trust helps both the grantor and beneficiaries avoid probate court. This is a drawn-out and sometimes expensive public proceeding that is often difficult on an individual’s loved ones. It incurs expensive legal fees and is emotionally taxing as a result of the stress. An irrevocable trust creates a direct line of ownership, bypassing this process.
This keeps your finances private. That may have value for someone with a large or complex estate, especially if the assets don’t immediately transfer. A trust can hold on to its holdings for years after the grantor dies. So, you can decide when your beneficiary inherits them.
Furthermore, irrevocable trusts have the potential to protect your assets if you’re liable to face lawsuits. The assets no longer belong to you. While that puts them out of your reach, it also keeps them out of the hands of creditors. Also, since you remove the assets from your taxable estate, you reduce the size of your taxable estate as a result.
What Are The Drawbacks to an Irrevocable Trust?
The main drawback is in the trust’s name. You cannot change the terms of the trust and lose control over the transferred assets. If you need to create any alterations, you have to go through a rigorous approval process. Every adult beneficiary has to agree to the changes you suggest. But it can be hard not to have control over your former assets.
For example, if you experience financial troubles, you can’t rely on the transferred assets to help you. While your trustees may be able to exert authority over the trust, that still might have its challenges if you didn’t implement that before setting it up. Overall, an irrevocable trust’s inflexibility can hurt you if you’re hit by unexpected financial or personal problems.
What Is a Will?
A will, commonly known as a last will and testament, is a legal document used in estate planning. With a will, an individual can dictate what their list of final wishes for an executor to carry out after they pass. That often involves the distribution of their assets upon death, although they can include other desires. For example, a parent might want to name a legal guardian for an underage child. Or, the person may have an organization he or she wants to give a monetary gift.
There are various types of wills out there, but each state has rules. Depending on where you live, your will is subject to particular guidelines that determine its legal validity. If you don’t have a will upon dying or fail to make sure yours adheres to the rules, you may leave your beneficiaries scrambling.
What Are the Benefits of a Will?
A will is a valuable tool for anyone undertaking estate planning. With a will you get to decide who does and doesn’t receive your assets. That can be incredibly important if you have dependents or certain individuals you want to provide for. Additionally, this choice keeps your property and money out of the hands of people who would misuse them.
When you make a legally binding and clear will, you ensure the proper beneficiaries inherit. That keeps your loved ones out of probate court. This legal proceeding is a financial and emotional burden. By creating a will, you avoid these concerns.
What Are the Drawbacks to a Will?
A will only works if it is valid. Each state has different regulations regarding the type of wills they allow and the parameters that make them legal. If you don’t pay attention to those rules, then the purpose of making the will may be lost.
With a will, you avoid probate court. However, if the document is not clear, leaves out a portion of the estate, or does not fit the appropriate criteria, then your beneficiaries may have to face legal consequences after all. In this scenario, it’s up to the court and intestate laws to decide how to follow the will’s wishes. This process includes evaluating your estate, contacting possible creditors, and more. Only after they have worked down the list do your beneficiaries get their inheritance, which they still might have to fight for. That can leave people like your spouse or child without the financial support they need.
Irrevocable Trust vs. Will: Key Differences
One of the main differences between an irrevocable trust and a will is in flexibility. You cannot change the terms of an irrevocable trust without working through a multi-step process. Even then, you might not receive the approval of a beneficiary, which means the change won’t go through. With a will, you can not only revise or restart it, but it’s encouraged. If your situation changes, a will gives you the opportunity to change your estate plan accordingly. That’s hard to do with an irrevocable trust.
Alternatively, a will doesn’t have the same protections as an irrevocable trust. The latter keeps your beneficiaries out of the probate court and protects your privacy from the public. A court can decide that a will is not legally valid and rearrange your desired distribution of assets. There are also tax benefits to an irrevocable trust. Since you retitle the assets, they no longer belong to you. That minimizes your taxable estate. It also keeps those possessions or property out of the hands of creditors or individuals who want to bring court cases against you. A will does not afford the same protections.
Both are important steps, though, if you want to protect your beneficiaries and possible dependents. A will allows you to name guardianship for them, while a trust ensures they receive an income.
Irrevocable Trust vs. Will: Which One Is Right For You?
Although both irrevocable trusts and wills have their strengths and weaknesses, they’re both valuable entities when it comes to estate planning. If you have a relatively large or complex estate, an irrevocable trust might appeal to you. It allows you to bypass the probate court and ensure the proper beneficiaries receive their inheritance. Furthermore, it protects your assets from taxes or legal fees. A will is an important document for a slightly wider pool of people. It can also help you avoid the probate court and pass down your assets to the right beneficiaries. It might be a better choice if you have a simpler estate to accommodate.
Both are valuable options if you want to protect a dependent long-term, though.
While everyone should have an estate plan in place, not all of them will look the same. The size and complexity of your estate will determine which documents or entities you need to create. It’s up to you to determine the best method of protection for both your hard-earned assets and the people you love.
Tips for Estate Planning
- Trusts have a more complicated set-up process than a will. So, it might help to have a financial advisor on your side to guide you. Finding the right one for the job is a cinch with SmartAsset’s free match-up tool. It helps you locate local advisors with the right knowledge. If you’re ready to begin planning, get started now.
- Estate plans aren’t just for soon-to-be retirees. If you have assets and people you want to protect, they’re an important tool. Consider creating a will to keep your loved ones safe. You can revisit it over time and ensure that it’s exactly what you need, even if circumstances change.
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