The two primary estate planning documents used to transfer your property after you pass away are the Will and the Trust. A will transfers property to beneficiaries after the will is presented to a probate court, and wills typically make outright distributions of property to your beneficiaries. A trust transfers property to your beneficiaries without any court involvement, and you can direct the timing and nature of distributions to your beneficiaries.
Although a simple will may be appropriate for some people, you should strongly consider whether a trust is appropriate for you and your family. Read on to learn about some of the pros and cons of setting up a trust as part of your estate plan.
The Pros of Creating a Trust
Generally speaking, trusts are excellent tools for lifetime planning, estate planning and incapacity planning. A trust might not be appropriate for everyone, but there are some significant advantages to using a trust.
- You can use a trust to determine how your property is distributed after your death, and no court involvement will be required to make the distributions in your trust. You also have significant control of how and when distributions are to be made to your beneficiaries. For example, you can make an outright distribution, or you can hold a beneficiary’s interest in trust until the beneficiary reaches a certain age.
- If one of your beneficiaries has special needs, using a trust is crucial. With proper language in your trust, your special needs beneficiary can still receive his or her inheritance without jeopardizing any government benefits he or she may be receiving.
- Trusts are very flexible. Changing or terminating a trust very simple, and your trust will retain its original trust date regardless of the number of amendments you make. On the other hand, if you want to make changes to a will, you essentially have to start over and create a new will.
The Cons of Creating a Trust
As discussed earlier, a trust might not be appropriate for everybody. Here are some of the disadvantages of setting up a trust:
- Because of their complexity, trust-based estate plans are often more expensive to set up than will-based estate plans. However, paying more upfront for a trust completely eliminates the expense of probate down the road.
- Income tax brackets for trusts are accelerated compared to tax brackets for individuals. Trusts are taxed at the highest marginal tax rate when income exceeds just $12,000. If your trust doesn’t provide for distributing income to you or another beneficiary, then your trust income could be taxed quite significantly.
- A properly drafted and properly funded trust ensures that your family will avoid probate entirely. However, a common mistake folks make is failing to transfer property to their trust. An unfunded trust (a trust with no assets) is essentially worthless and will still subject your family to probate.
Understanding What is Right For You
There are certainly advantages and disadvantages to both trust-based and will-based estate plans. Talking with an experienced estate planning attorney will help you understand what plan is right for you and your family.
Call The KC Estate Planner, LLC, today to schedule a free consultation and see if a trust-based estate plan is right for you.