Do you need a trust if you already have a will? Many people think one covers the other, but when it comes to estate planning, a trust and a will are two different things.

A will is more like an extremely detailed set of instructions to be followed after you pass away. For example, your will names the executor of your estate and determines who will be the guardian of your children if necessary. You can distribute assets in your will, but it’s not necessarily the best way to do so, which is why so many people use a trust.

Many people think that trusts are only for the super-wealthy, but this is not so. This thinking is one of the main reasons why trusts are so under-utilized.

What about probate?

Probate is another legal process relating to asset distribution. It occurs when a court distributes an individual’s assets. The court uses a will as a guide to who gets what, but people can protest a will, so there is no guarantee that your assets will go where you want them to.

If you have a retirement account, it will not go to probate as long as you have a living named beneficiary. Same with life insurance proceeds and bank accounts with a payable on death or transfer on death with a named living beneficiary. Accounts with joint owners also generally transfer to the living owner without going to probate.

All assets that do not pass directly to your spouse or heirs generally go to probate court. This process is long and can be contentions, so many people try to avoid it whenever possible.

A living trust can help avoid many problems.

When you use a living trust instead of a will, assets owned by the trust will skip probate and go directly to your heirs as you have outlined the distribution in the trust. A trust is the best way to control what happens to your assets after you pass.

Here is an example. Say you and your spouse have two adult children who are your heirs and a taxable brokerage account worth $500K. One option you have is to put the account into a trust, and pass the money along to your spouse when you die or to your children if your spouse is no longer living.

If your children are young, you may want to stipulate that they cannot inherit the money until they reach a certain age. For example, maybe you want them to have half of their share when they are 30 and the second half when they are 40. You can also set it up so the trustee can distribute money for special expenses before these ages, for example, to pay for college tuition or a wedding.

Now, let’s say that you had children from a previous marriage. Depending on your family dynamic, you may want to bypass giving your spouse control of your account to ensure that all of your children get the same amount. In this case, you can set up the trust so that the account goes directly to your children, setting up stipulations for how and when it is to be distributed.

Trusts and taxes

Assets in your trust remain in your control while you are alive and are taxed the same as any of your other assets. After you pass, some assets are eligible for a step-up in basis, even if they are a part of your trust.

That said, estate planning using a trust can help you avoid some estate taxes. In 2020, the estate tax exemption from the federal government was $23.16M, portable between you and your spouse. Some states also have estate taxes to consider. You can use a trust as a credit shelter or as a way to preserve the exemption.

In this case, any assets up to the exemption amount could go from the living trust to a credit shelter trust. Anything remaining could go to a family trust. If your surviving spouse dies later the same year, the credit shelter trust wouldn’t be included in the taxable estate, which would reduce the amount of taxes owed significantly.

Final Thoughts

Trusts can help you accomplish many goals and have control over your assets long after you are gone. When planning your estate, you should regularly consult with an attorney or qualified financial planner to make sure your current situation aligns with your future goals within the confines of the law. Legislative changes may occur that force you to revisit your plan, but a little bit of work and planning upfront can save you and your loved ones a lot of hassle down the road.

Any opinions are those of Thomas Fleishel and not necessarily those of Raymond James. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.