What is a Will?
A will is a legal instrument that permits a person to make decisions on how his possessions will be managed and distributed after his death.
What are the Disadvantages of Using a Will?
Wills are commonplace and many people think that they should assign and distribute their assets using a will. But there are disadvantages of using a will. Namely, a will is subject to costly probate proceedings, the contents of a will are public record, and a will is tax inefficient, i.e., you will lose out on tax dollars when you use a will to manage and distribute assets after death.
Probate is a Costly and Time Consuming Process
Probate is a legal process supervised by the courts after someone dies to ensure payment of debts and distribution of property to the people who inherit it. The probate process is expensive and can be time consuming, especially when an estate is complex. Why? Probate involves proving in court that a deceased person’s will is valid, identifying and inventorying the deceased person’s property, having the property appraised, paying debts and taxes associated with the estate, and distributing the remaining property as the will directs. As a result, probate typically involves a lot of paperwork and court appearances by lawyers that generate substantial fees. The lawyers and court fees are paid from estate property. And the people who inherit the deceased person’s property get less.
Lack of Privacy as a Public Record
A will also becomes public record at the time of death. Therefore, any individual can request a copy of the will. This individual will then gain knowledge of private affairs and there is no way to keep the contents of the will private.
Excessive Taxes
Lastly, as mentioned above, the use of will causes the individual to lose out on tax dollars.
What is a Trust?
A trust is created by a trustor who arranges for a person or corporate entity, called a trustee, to hold legal title to property for another person, called a beneficiary. You can be the trustee of your own living trust, keeping full control over all property held in trust. For example, a “living trust” is simply a trust you create while you are alive, rather than one that is created at your death- a testamentary trust. This is a key difference between trusts and will because a will only takes effect at the death of an individual. However,
living trust is only one type of trust and there are different kinds of trusts making it a versatile mechanism for managing and distributing assets.
What are the Advantages of Using a Trust?
There is a misperception that trusts are only to be used by wealthy or rich individuals. But this is not the case. A trust should be used in most instances, especially in complex estates, to help you avoid relatively costly probate, maintain privacy and reduce transfer taxes.
Avoid Costly and Time Consuming Probate Process
Unlike a will, a trust is not subject to costly probate proceedings that can tie up valuable estate dollars in paying court costs and attorneys fees. In essence, trusts side-step entirely the probate process. As a result, the use of a trust can potentially keep more money in the family and avoids an unnecessary waste of income and time.
It is also important to note that the avoidance of probate makes a trust more certain than a will. Well drafted trusts will ensure that there are no ambiguities and it will always be clear who stands to benefit both while you are alive and after you are deceased. You will not have to worry about whether a will meets certain validity requirements in the probate process or worse be subject to predetermined (and arbitrary) state mandated distributions in the event that the will is deemed invalid. You will maximize control of the assets when you use a trust.
Ensure Privacy
Unlike a will, the trust remains private at all times even after the death of the individual who created the trust. You will not have to worry about the public gaining access to information that you only want to keep with trusted individuals.
Saving Money on Taxes
There are also tax advantages of using a trust. It is a tax efficient method of managing or distributing assets. For example, the transfer of assets to a trust is taxed once and is taxed at the size of the asset being transferred. Similar to the elimination probate, this tax efficiency makes trusts a method that preserves more money compared to a will. In some instances, taxation is avoided for at least one generation.