Is A Trust Better Than A Will ?

There are books on this topic that strongly suggest that a trust is better than a will. The argument most often used is that you will avoid probate and save time and expense.

What is a trust?

A trust, when properly prepared, creates during your lifetime (inter vivo trust) or at the time of your death (testamentary trust) an entity that holds trust assets for your benefit or the benefit of other persons or entities who are called beneficiaries. The person creating the trust is called the Settlor.

An inter vivos trust or a testamentary trust is created by a legal document wherein your intent is expressed. With an inter vivos trust you immediately transfer to the trust the assets that you wish to be covered by the trust. Typically it is the larger assets such as your residence or other real property (second home or investment properties), brokerage accounts and larger assets but not automobiles. You don’t transfer automobiles to the trust because they are more often replaced. A testamentary trust does not become operative until you pass because your assets are kept in your name until your demise.

Here is a list of some of the trusts that clients more often use:

  • Revocable Trust Agreement
  • Retirement Asset Trust
  • Testamentary Trust
  • Crummy Trust – Don’t let the name fool you-- this trust is used by the very wealthy.
1. Revocable Trusts

The client is the Trustee and it is the trustee who manages the trust. The trust may be terminated as long as the Trustee client is competent. This trust is often used so that the client has complete control over all of his or her assets during his/her lifetime, and upon the Settlor’s ( client’s) demise or disability the assets are managed by a designated Trustee who is named in the Revocable Trust Agreement. That trustee is called a successor trustee. When the Settlor (client) is unable to manage his property and at least two physicians certify that event, then the client’s property is managed by the successor trustee named in the Revocable Trust Agreement. The property upon the client’s death is directed to those designated beneficiaries described in the trust document or to their descendants. Often the beneficiaries do not receive their bequest immediately in a lump sum. For example, the beneficiary is supported and provided with their health, education, and welfare needs and is provided with a portion of the total amount of their share in increments. Some clients have designated one third at age 30 and at age 30 the beneficiary receives one third of the total amount of the beneficiary’s bequest. Then at age 35, one half of the remaining beneficiary’s share, and at age 40, the balance is released to the beneficiary. Younger people receiving large sums of money become distracted or lose motivation to complete school because their bequest provides a quick burst of money that enables them to acquire other assets and not have the motivation to do school work.

Why do we encourage delay of distributions?

Unfortunately, distributions are often spent by beneficiaries during a period of one year or less. Beneficiaries are often unduly influenced by spouses, significant others and criminals to spend the money. Criminals read death notices and can identify beneficiaries by the details of the death notice and use of the internet, social media and by attending the funeral. Also, persons of means often direct assets to children who have little experience managing money.

2. Retirement Asset Trusts

Many clients have 401(k) and/or 403(b) plans, IRA’s whether traditional or Roth and deferred income that has not been previously taxed (except in Roth IRAs) and need to have a plan to distribute their retirement assets as well as mandatory minimum distributions to the client or their beneficiaries. The Federal Government establishes the minimum mandatory distribution amount based on the life expectancy of the older beneficiary. The major risk for the beneficiary is the temptation to take a lump sum distribution. There are other ways of stretching out the distributions but there is still the larger and immediate tax liability of lump sum distributions. Through the use of a Retirement Asset Trust, the client may set forth a plan that states how much and when the beneficiary will receive distributions in the case of a young or less mature beneficiary. In the alternative, the plan may delay payments above minimum distributions amounts to meet the client’s beneficiary’s needs.

3. Testamentary TrustsThe testamentary trust does not immediately transfer the client’s assets to a trust as the transfer goes into effect upon the death of the client. Much of previous explanation and justification for utilizing a testamentary trust is applicable to a testamentary trust.

The answer to the question “Is a trust better than a will” is far more complex than can be answered simply. I provide my clients with options to respond to their present and future needs. My clients ultimately decide which approach-to have a will, a trust, or a combination, best meets their needs.

Also, when selecting an attorney for preparing your will and/or trusts, you should select an attorney who, in addition to preparing trusts and wills and related documents, has experience in administering estates and trusts.

Fred Antenberg has provided both. Contact Fred for a Free Initial Consultation by calling 410 730 4404.