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Will or Trust…Which is Better? A Wealth Manager’s Take

[et_pb_section admin_label=”section”] [et_pb_row admin_label=”row”] [et_pb_column type=”4_4″][et_pb_text admin_label=”Text”]What happens after you die? No, I’m not talking angels or pearly gates. What I really mean is, how are you sure your loved ones are taken care of? Thinking about the future beyond your own death is certainly not the most comfortable subject, but in the end, there’s nothing more important than ensuring the well-being of those closest to you. 

Given the fact that you’re reading this, you probably already know this, so let’s skip the sentiments and get right into the big questions. If you don’t feel that simply setting money aside is a sufficient enough plan (it’s not!), there are generally two main vehicles for distributing your assets in the afterlife. The most well-known option is a Will, a legal document that everyone should have—but do you also need a Trust? And when choosing a Will or Trust, what should you consider? 

A Will defined

The day you pass away, who would you rather leave in charge of your affairs— your most trusted friends and family members, or a swarm of state officials? By failing to prepare a Will, your estate will likely be controlled by the latter group, as any sort of inheritance ambiguity quickly winds up at the center of a complicated legal mess and will be resolved according to state laws. 

As the standard, legally-binding document for setting forth your post-mortem wishes, a Will clearly spells out how your assets will be distributed, who will manage this process, who will take over your business affairs, and, if needed, clarifies who will care for your minor children. 

There are two primary Wills you can utilize: 

  • Holographic Will– A Will prepared by simply writing down your last wishes with no witnesses.
  • Testamentary Will– Required in many states, a testamentary Will is witnessed and notarized. 

Regardless, it’s advisable to have a lawyer involved to ensure the Will is worded correctly and in accordance with state laws, as there are a few statements that may be explicitly required in the document. A Holographic Will is generally not recommended as a way to prepare for your death in advance.

When you write a will, you will address some basics, including naming an executor. This individual is charged with actually executing the terms of the Will, overseeing and managing your estate as assets are distributed to any beneficiaries named in the document. 

Obviously, this job can come with some pressure, especially if your heirs contest the will and any bequests you’ve made. Be sure to make the executor aware of their responsibilities ahead of time, and double-check that they’re up for the task. The executor is also generally advised on the location of the Will, making it easier for them to access when the time comes. 

You should also discuss guardianship with any friend or family member you intend to name as a guardian of minor children in your will, as this comes with a lifetime of responsibility. 

Benefits of using a Will

If you want any control whatsoever over what happens to your wealth and your business when you die (and who wouldn’t?), having a Will presents a number of advantages. 

  • You get to divvy it up however you want– In the absence of a Will, it’s likely that a state court will decide how your assets are allocated among your heirs. Typically, they’ll award the majority of your estate to immediate family (spouse, children, and parents) first. If you’re looking to apportion your property any differently, having a Will is one reliable way to do so, giving you the ability to specifically outline which heirs get what. 
  • You’ll get to choose someone competent– You’ll want someone honest and trustworthy to handle important tasks like inventorying your assets, closing out lingering debts, and guiding your estate through various legal processes. If you don’t have a Will, however, the state will appoint an executor for you, leaving the integrity of your inheritance up to any individual who petitions for the position (like that neighbor who refused to clip his hedges? You really want him acting as your executor? It could happen). Writing a Will is the only way to be truly confident you’re entrusting your estate to the hands of someone credible and capable.
  • Get into a fight with your brother, no problem– It’s easy to feel like there’s no room for error when writing your Will, but these decisions aren’t necessarily set in stone. If your marital status changes or you’re looking to revise your list of beneficiaries, your Will can be amended with the stroke of a pen. It’s preferable that you have these changes reviewed by an attorney and notarized, but it’s comforting to know that your first draft of a Will doesn’t have to be the version you take to the grave.

Challenges of using a Will

Although having a Will can bring greater comfort and clarity to your heirs, like any legal document, there are a few caveats and challenges to consider. 

  • You really should follow the rules– If improperly drafted, your Will could potentially be contested, leaving your friends and family to deal with the fallout of a tense legal toss-up. This is especially worrisome if you own a business. For this reason, it’s important to have a firm grasp on your state’s rules and standards—the last thing you want to do is leave your loved ones with a litany of lawsuits in their moment of mourning. You should seek the services of a trust and estate attorney to ensure compliance. 
  • Prepare to be on display– By drafting a Will, you’re making your estate a matter of public record. While your Will is usually kept private until you die, shortly after you pass the document will be handed off to a probate court, kicking off the legal proceedings required to settle your estate. At this point, your Will becomes accessible to anyone who wishes to view it (and is often available for free online).

A Trust defined

If you’re considering writing a Will, have you also contemplated a Trust? Whereas your Will is a document for outlining how your estate will be allocated after death, a Trust is a fiduciary agreement for allowing a third party (known as a trustee) to hold assets for your beneficiaries. Unlike a Will, a Trust not only applies to your wishes after death but can also help you manage assets throughout your life. 

The rules of managing a Trust vary depending on the jurisdiction, but in most cases, they share a few key traits. The Trust itself owns your assets, and your Trust document will outline how assets in the trust should be used and for whose benefit both during and after your lifetime.  

Most importantly, Trusts are highly versatile vehicles, providing a number of protections and advantages that a Will simply lacks. With these benefits, however, come a number of additional considerations, and individuals will need to weigh the trade-offs of each type of Trust.

Revocable Trust vs. Irrevocable Trust

Nothing is certain except for death and taxes. Luckily, a Trust can help you manage both. When it comes to choosing the type of Trust, however, most of our clients share a common question: should I create a revocable or an irrevocable trust? As always, the answer depends on your priorities. 

Revocable

For individuals hoping to maintain close control over their assets during their life, a revocable trust tends to be the default option, often called a “living trust”. You can think of this vehicle as a Ziploc bag. It’s easy to make changes, and you’re free to open the bag and take assets out or put them in at any given moment. You still control the assets despite the trust owning them–it’s as if they are yours except in title. 

This ability to continue freely managing your assets sounds appealing at first, but it’s also a double-edged sword. Because the assets in a revocable trust remain in your estate, they’re also potentially subject to claims from creditors or lawsuits during your lifetime. Assets in a revocable trust are included in your taxable estate at death–there are no tax savings with a revocable trust. In any case, once you die, all revocable trusts become irrevocable, meaning the terms of your trust will control what happens to the assets under a new Tax Identification Number.

Irrevocable 

If a revocable trust is a Ziploc bag, an irrevocable trust is a wooden box nailed shut. Whatever assets go into the box can’t be taken out by the grantor (at least, without the permission of other parties). 

But why in the world would you want to stuff your money in a box with no hope of taking it back if you change your mind? The main appeal is, of course, tax benefits. Irrevocable trusts offer the ability to minimize the effect of estate taxes, providing a vehicle for passing on large sums of wealth to spouses, children, or charities while reducing the size of your future taxable estate.

Naturally, those who grant money to an irrevocable trust tend to be wealthier individuals, but they’re also favorable for meeting other objectives, like transferring property to grandchildren or protecting beneficiaries with special needs. 

Benefits of using a Trust

Regardless of whether you choose the flexibility of a revocable vehicle or the estate-reducing irrevocable trust, both flavors of Trusts offer a number of unique estate-planning benefits. 

  • More privacy– Trusts provide a much higher degree of privacy. Individuals can outline the same beneficiary allocations as they can in a Will without being required to publicly post the details. Assets owned by a Trust avoid the public probate process.
  • More control post-mortem– Trusts give you the ability to plan further into the future beyond your death, allowing you to spell out exactly how and when beneficiaries of the Trust can access the Trust’s assets and the income they produce. They also provide protection from the claims of creditors and provide ways to ensure wealth is preserved for generations to come if desired. 

Challenges of using a Trust

  • It’s going to cost you– Although titling assets in a Trust will provide a variety of benefits during and after your life, there’s no question that writing a Trust with an attorney will create additional legal costs beyond just writing a Will. 
  • Plan to hire an accountant– A Trust, particularly an irrevocable one, also calls for a more careful accounting process as you’ll be required to keep a detailed list of assets and transactions, which can be a headache if a simple Will would have met your goals for transferring assets to your heirs at death. 
  • Thinking further into the future– Most importantly, a Trust may demand more careful consideration of your potential successor, as a future trustee will likely have more management responsibilities when compared to executing an estate under a Will, which is completed shortly after death. You may need to think about the succession of multiple trustees if you desire for your Trust to remain in effect far into the future beyond your death.

It’s not either/or.

Wills and Trusts are not an either/or decision. When combined strategically, Wills and Trusts can be complementary vehicles for managing a single estate. The most commonly utilized hybrid is the pour-over will, which directs property to be moved into a trust upon death (usually for recently-acquired or forgotten assets left out of the trust before death). 

In many cases, the Will may even contain explicit instructions, directing the family to defer to the Trust for the most important and detailed matters of inheritance. 

Stop waiting.

No matter if you’re using a Will or Trust, or a little bit of both, the process of getting everything prepared can sometimes feel like an overwhelming responsibility. Improving your estate’s privacy and optimizing for taxes are appealing benefits, but they also require a considerable amount of strategy and planning. 

Effective execution of a Will or managing a Trust is certainly a daunting challenge, but partners like Monument Wealth Management offer their clients a fully customizable and elite experience called Private Wealth Design. By wholly considering and seamlessly integrating a client’s entire wealth picture, Monument’s thoughtfully curated advice provides clarity and removes the anxiety of the unknown–something that they felt was sadly missing from the industry.

At Monument, your involvement is a crucial ingredient in the wealth plan you’re after. That’s why our in-depth approach incorporates you every step of the way. If you’re ready to cross estate planning off your bucket list, Monument Wealth Management is here. 

 

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Monument Capital Management, LLC [“Monument”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Monument.

Please remember that if you are a Monument client, it remains your responsibility to advise Monument, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Monument is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of Monument’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request.

Insurance specific:

The decision to purchase life insurance should be based on long-term financial goals and the need for a death benefit. Life insurance is not an appropriate vehicle for short-term savings or short-term investment strategies. Generally, early surrender charges may apply during the life of the policy. Those charges may decrease the value of the policy substantially depending on how early the policy, or any portion of it, is surrendered or accessed. While a policy allows for access to the account value in the short-term, through loans and withdrawals, there are costs and risks associated with those transactions. There may be little to no account value available for loans and withdrawals.

Estate taxes may apply to insurance proceeds. Consult a financial or tax advisor about your specific financial situation.

Insurance Products are made available by unaffiliated third-party licensed insurance companies. A contract’s financial guarantees are subject to the claims-paying ability of the issuing insurance company.

Variable/Universal Life:

Variable life insurance is a complex vehicle that is subject to market risk, including the potential loss of principal invested. You should consider the investment objectives, risks, charges and expenses of the variable insurance and its underlying investment options carefully before investing. You should review the product prospectus carefully before you invest. Variable universal life insurance is permanent life insurance that offers protection and an opportunity to build cash values. You will incur mortality and expense fees and subaccount expenses and you may also incur optional rider expenses, surrender charges, and policy charges. Please Also NoteIF you are a Monument client, please advise us if you have not been receiving account statements (at least quarterly) from the account custodian.

Please Note: Monument does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Monument’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.[/et_pb_text][/et_pb_column] [/et_pb_row] [/et_pb_section]