Knowing the types of trust is a must and knowing what is suitable to your current situation is a clever step in planning your affairs. Many people are under the misconception that trusts are only for people who are extremely wealthy. And while there are certain types of trusts, irrevocable trusts most commonly, that are used by individuals who are very wealthy and thus subject to the federal estate tax, revocable living trusts are a valuable estate planning tool that shouldn’t be overlooked.
While you should consider talking with an experienced estate planning attorney about your estate plan, here’s some information about trusts and wills that you may find helpful.
Types of Trust
Irrevocable trusts vs. revocable living trusts
Wealthy individuals often set up an irrevocable trust for estate and tax considerations. The benefit is that an irrevocable trust removes all incidents of ownership, which means that the trust’s assets are removed from the grantor’s taxable estate. It also relieves the grantor of tax liability on the income generated by the trust’s assets.
When a grantor puts assets into an irrevocable trust, he or she removes all rights of ownership to the asset that the trust contains. This type of trust can’t be modified or terminated without the beneficiary’s permission.
Individuals will be subject to the federal estate tax if their estate (cash, real estate, and other assets) is worth $5.43 million or more, $10.86 per married couple.
Here are the main differences between irrevocable trusts and revocable living trusts:
- Removes ownership of trust’s assets
- Used for tax purposes, since the value of the assets in the trust aren’t calculated in the total value of the estate at the time of death
- Commonly used among people with large estates who are subject to federal estate tax
- Cannot be modified or revoked without beneficiary’s consent or special power of appointment
- Assets are protected from creditors since they no longer belong to the grantor
- Trustee is generally an independent person chosen by the grantor
Revocable Living Trust
- Grantor retains ownership of assets in the trust
- Assets in the trust are calculated into the total value of the estate at the time of death
- Commonly used among individuals who don’t want their estate to go through probate
- Can be modified or revoked by the grantor
- Assets are not protected from creditors since they still belong to the grantor
- Grantor usually also serves as the trustee
Will a revocable living trust work better for me than a will?
This depends on your situation. Certain personal or family situations are better suited for a living trust, like if you have concerns that your beneficiaries might not be able to manage financial affairs or if you have a disabled child for example, but some people are fine with just a will.
Yes, a revocable living trust, if used properly, will keep your estate out of probate court and can ensure that your assets pass to your beneficiaries in a timely manner after your death, but it is also important to keep in mind that although your loved ones may not have to pay probate court fees, trusts aren’t free, and that cost should be taken in to consideration when deciding whether or not a revocable living trust is the right option for you and your family. A living trust costs between $1000-$3000 while a simple will can cost $300 or less. That cost alone is enough to make some people stick to a will alone.
However, you should also take these comparisons into consideration:
Privacy: A revocable living trust also ensures that your family’s business isn’t made public in court and public documents after you die, so if that is important to you, this type of trust might be a good option. Court intervention isn’t necessary with a living trust unless there is an issue due to improper drafting.
Disability: A will itself doesn’t offer any provisions for if you become disabled, while a living trust will continue to manage assets if the grantor becomes disabled. However, if you do have a will, a power of attorney can be used in conjunction in order to provide instruction in case you do become disabled.
Creditor Protection: Neither a will nor a living trust will offer protection from creditors while you are alive. If you have a will, creditors have a specific amount of time that they are allowed to make a claim after you die. If they miss that window of opportunity, they will be barred from making a claim forever. This type of issue doesn’t come up often with living trusts because most people direct in the trust that debts be paid.
Ease of Disposition of Assets: wills normally take longer to settle after death and incur more costs than living trusts.
Cost: Wills don’t usually cost much unless you are doing tax planning. Living trusts tend to cost a little more than wills. There isn’t a big cost difference between wills and living trusts if you are doing tax planning. After death, the amount that it will cost to prove (probate) the will in court varies. If there is a contested probate, ancillary probate or another issue, it can be very expensive. Living trusts don’t usually cost much at all once you die.
Can I have both a living trust and a will?
Yes, estate planning attorneys recommend it. That’s because there are some things that a will can do that a trust simply can’t. For example, most people don’t put everything they own into their living trust. So the items that are left out need to be listed in a will so they can be distributed according to your wishes after your death. A will can be used like a catch all to name someone to get all the rest of the property that you haven’t left to a beneficiary or left to someone in a trust.
If you have questions about estate planning in Arizona, please reach out to an experienced attorney. At Bredemann & Shellander, P.L.C., we specialize in estate planning in Arizona and Pride ourselves on taking the time to understand your unique situation so we can guide you through the estate planning process. We are happy to look over your estate plan for free or help you build your perfect estate plan from start to finish. Give us a call at 800-836-4135 or schedule a free consultation online.