Will vs. Irrevocable Trust: The Top Five Differences
Comparing a will to an irrevocable trust. Who wins?
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When meeting with your financial planner to prepare or modify your estate plan, a discussion about the best ways to accomplish your goals will invariably involve wills and irrevocable trusts
. Depending upon the types of assets you own, family circumstances, possible health concerns, and other factors, your financial advisor might recommend the use of an irrevocable trust
either alone or in collaboration with a will.
Irrevocable trusts can be an effective estate-planning vehicle
even though they involve relinquishing ownership of all or part of your assets to the trust. Understanding the role wills and trusts play in an estate plan can help to ease concerns. You can begin with the following top five differences between an irrevocable trust and a will:
If the children experience financial difficulty during the life of the parents, creditors may be able to put a lien on the residence. They could not force a foreclose on the lien while the parents were alive, but the existence of the lien would still cause problems for the children when the property transfers following the death of both parents. If a child gets divorced, the house in a life estate is considered a marital asset and the ex-spouse could get half.
1. Irrevocable trusts will reduce your estate tax liability.
The law treats assets properly transferred into an irrevocable trust as no longer being owned by you. One of many benefits of this fact is the removal of the property from your taxable estate when you die. Neither the property nor its appreciated value will increase your estate tax obligation
Unlike an irrevocable trust, a will does not change the ownership of your assets during your lifetime. A last will and testament does not become a legally enforceable document until it is probated with the surrogate’s or probate court after your death. The assets you own during your lifetime are taken into account when determining the value of your taxable estate when you die.
2. Avoiding the costs and delays of probate.
Property passing to your heirs and beneficiaries
through a last will and testament require a probate proceeding
for the appointment of the person you designated in your will as your executor or personal representative. The executor named in the will does not have power to act until granted that authority by the probate court.
This can mean additional expenses for lawyer’s fees, appraisers, accountants, and court costs as well as delays unfreezing assets as they are evaluated by the court; a probate can take 6-12 months depending on the state - more if there are challenges. Difficulty processing the paperwork involved in a probate proceeding or challenges to the validity of the will from disgruntled relatives left out of the will can delay the transfer of assets to your designated heirs and beneficiaries.
An irrevocable trust avoids probate for the assets you transferred to the trust during your lifetime. When you die, your trustee distributes the property remaining in the trust in accordance with its terms. Court proceedings to appoint a representative are unnecessary because your trustee already is empowered to manage the trust assets.
3. Privacy - Protecting assets from creditors.
Property in an irrevocable trust that has been properly drafted, executed, and funded in any state is treated as legally belonging to the trust and no longer belongs to you; the trust property is out of reach of your personal creditors
. When created under the guidance and advice of an expert, an irrevocable trust can be an effective shield against personal creditors. If an attorney for a prospective lawsuit checks a person who created an irrevocable trust to hold assets, they won’t see any and the lawyer probably won’t be interested in taking the case on contingency. The lawsuit is stopped before it starts.
A will does not transfer your assets out of your name during your lifetime. As a result, assets you own might be subject to claims by your creditors. When you die, your creditors can file claims against your estate and might be entitled to payment from your estate assets before they are distributed. If an attorney for a prospective lawsuit checks a person who created a will for assets, they will see that they still own the assets in their name and will be able to attach or freeze assets with a preliminary judgement.
4. Planning for long-term care.
Assets you and your wife own are taken into consideration when determining your eligibility for Medicaid
nursing home assistance. Unlike Medicare that does not involve income and asset limits to qualify, Medicaid is not available if your income or assets are above the limits set by Medicaid.
This can become an issue for elderly individuals in the need of a higher level of care than they can receive at home. Medicaid pays the costs of extended nursing home care if you qualify financially. Some attorneys and financial planners use irrevocable trusts instead of wills to assist people to plan for future nursing home costs
. Assets in an irrevocable trust that is properly drafted, executed, and funded are not counted by Medicaid in determining eligibility, but the laws are complex and should be discussed fully and completely with a Medicaid Planning expert.
5. Property in an irrevocable trust is out of the creator’s reach.
The benefits derived from having your assets out of your name and owned by a trust that is properly drafted, executed, and funded are lost on some people who are concerned about giving up ownership to a trust managed by a trustee. A will does not create this type of concern during your lifetime, but a will does not offer any of the benefits and protections of an irrevocable trust
and the executor designated in your will controls your estate after your death in much the same manner as a trustee giving rise to the same potential concerns.
The peace of mind that a creator or grantor of a trust achieves depends upon the terms and conditions of the trust agreement. A trustee is a fiduciary
owing a legal duty of loyalty to the trust and those who benefit from it. The laws impose serious penalties and consequences on trustees who violate their fiduciary duties.
If you are looking to avoid probate as well as minimize estate taxes, protect asset from Medicaid, or Protect assets from creditors, then you may want to consider what makes a good irrevocable trust
because they are not all the same even though they both have the name “irrevocable trust.”
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Rocco Beatrice, CPA, MST, MBA, CWPP, CAPP, MMB - Managing Director, Estate Street Partners, LLC. Mr. Beatrice is an "AA" asset protection, Trust, and estate planning expert.