At eLegacy, our clients are used to us touting the benefits of a Trust as an Estate Planning tool that can operate in lieu of a Will to pass your estate down to your heirs. When you understand and appreciate the benefits of using Trusts, it becomes easier to see how Trusts have several advantages over Wills as testamentary documents.
That being the case, our clients are sometimes surprised that we recommend that their comprehensive Estate Plans include a Will. So what’s the story? Why do you need a Will if Trusts are superior to Wills for passing on your estate?
Not Everything Can Be Taken Care of Through a Trust
A Trust is an advantageous mechanism for managing specific assets that you own. These can include homes, bank accounts, investments, and so on. But Trust cannot take care of every matter.
One significant issue that a Will can address is guardianship. When you have minor children or an adult relation such as a disabled spouse or special-needs child who depends on you for care, your Will can name someone you trust to have legal guardianship over this individual after you pass away. Legal guardianship empowers someone to make decisions on their behalf, whether it is about medical care, education, and so on. While a Trust can provide for the financial needs of these individuals, the Trustee’s duties toward them are fiduciary only; you will need a Will to establish Guardianship.
Trusts Only Control the Assets that Belong to the Trust
A Trust only controls those assets that are transferred into it. This requires more than merely setting up the Trust; you must legally transfer these assets to the Trust.
For example, if you want to put your home into the Trust, you will have to transfer the deed of the property to the Trust, and the transfer must be duly recorded in county records. In other words, the Trust is a separate legal entity from you, and any assets you want to put in the Trust will have to be owned by the Trust. This includes bank accounts, investment accounts, and so on: even if you are a Trustee, the accounts are owned by the Trust, not you.
Because the Trust can only pass on what is in it, the reality is that there will be some assets outside of the Trust when you pass away. For example, ownership of cars or other vehicles is commonly outside of Trusts (except special vehicles, like collectibles or expensive yachts). Putting the title to a vehicle in a Trust can be troublesome. Vehicles generally lose value, and most people want the flexibility of selling or trading them in without the hassle of trying to manage those transactions through a Trust. Frequently, there are often personal property items, such as jewelry, household items, and cash, that have not been put into a Trust, particularly if they are recent acquisitions. You will need a Will to cover these items and any other item you have forgotten to account for.
Your Will and Trust Can Work Together
A Will can take care of distributing any items that are not part of your Trust to your heirs. However, a more common use of a Will for people who use Trusts as their primary testamentary vehicle is to create a “pour over” Will. This type of Will provides for all of your assets that remain outside of the Trust at the time of your death to “pour over” into your Trust so that all of your Estate can be managed and distributed from the Trust. With this type of Will, your Trust and Will work together to account for all of your estate’s assets.
It is important to remember, however, that there still may be things outside of your Will and Trust that may benefit your heirs, including life insurance policies, pension plans, and retirement accounts (such as 401(k)s and IRAs). The funds in these accounts are not part of your Estate; instead, when you create these accounts, you designate your beneficiaries directly in the account documents.
However, in most cases, you can name the Trust as the beneficiary if you want the Trust to handle everything. There may be good reasons to have the funds in these accounts transfer to a Trust rather than go directly to a named individual beneficiary. For example, if you have minor children, you may not want them to receive funds right away if you were to pass away now. By naming your Trust as beneficiary, you can provide for the Trust to manage the funds for your children’s benefit until they get older.
Good estate planning must consider many contingencies. It is crucial to think through the different scenarios that might occur to ensure your estate is managed the way you want it to be after you are no longer around to manage it.
For assistance with understanding Trusts and Wills and to have your questions answered about putting together a comprehensive Estate Plan, please get in touch with us at eLegacy today.