The Advantages of a Trust vs a Will

When you are creating an estate plan, there are a variety of tools you can use to document your final wishes for your assets. Two of those tools are the Last Will and Testament and a trust. Understanding the advantages of a trust vs a will can help you choose the best estate planning tool for your needs.

The Differences Between a Trust vs a Will

Both a will and a trust are estate planning tools that you can use to transfer your assets to your family, friends, philanthropic organizations, and other beneficiaries after your death. However, they operate differently.

What is a Will?

A will is a document prepared while you are alive (and mentally competent), which names a personal representative (sometimes called an executor), and provides instructions for how that personal representative should distribute your assets at your death. You can consider a will like an instruction manual that the personal representative will follow, under the supervision of the Maryland probate court.

What is a Trust?

A trust is a legal entity that holds the assets of the person who creates it, called a grantor. Like a will, the trust documents, which form the trust, name a trustee to oversee the management of those assets, including when, how, and for what purpose they can be used. A trust also names beneficiaries who can receive distributions from the assets or the interest accumulated from their management. However, unlike a will, a trust is a separate legal entity. It exists outside the probate court process because it survives even after the person who created it dies.

Different Types of Trusts

Depending on what you want to do with your assets, and who you want to benefit from it, you may want to create different types of trusts:

• Living Trust: A trust created and funded during the creator’s lifetime, which can be used for the grantor’s benefit while still alive. It is often used to avoid probate court (as explained below).

• Revocable Living Trust: A type of living trust, a revocable living trust provides the flexibility of adding, withdrawing, changing, and even revoking the trust up to the point of the grantor’s death. It is often used to provide for the creator during their final years, and then provide for their heirs and beneficiaries after death.

• Irrevocable Living Trust: While this trust is made and funded while the grantor is alive, the transfer of property into an irrevocable living trust is final. It is often used to minimize estate taxes or protect assets when the primary beneficiary receives certain government benefits.

• Testamentary Trust: Written into the grantors’ will, this trust creates a new legal entity to hold those assets and distribute them to the beneficiaries of the trust. It can be used to take advantage of a federal estate tax exemption.

The Advantages of a Trust Over a Will

Creating and managing a trust can be more complicated than writing a will, but there are several advantages of a trust over a will depending on you and your family’s needs, the size of your estate, and the types of assets included in it.

Funding Your Lifestyles While Alive

A will doesn’t go into effect until the creator passes away, but a living trust can be used to manage the grantor’s assets for his or her benefit during his or her lifetime. In a revocable living trust, in particular, the grantor often acts as the first trustee, managing the income and assets of the trust to fund his or her own lifestyle. The grantor can even make distributions to loved ones as their needs arise, allowing the grantor to see their beneficiaries flourish.

Avoiding Probate Costs and Procedures

The reason most people create trusts vs wills is because they don’t want their loved ones to go through the time, hassle, and cost of probate administration. Because the trust is a separate legal entity that survives the grantor’s death, it retains ownership of the trust assets without any need for a Maryland probate judge to oversee the accounts. This is especially useful for grantors who own real property in several states, since without one, their loved ones may need to open an ancillary estate in each state where the real property is located.

Guidance for Beneficiaries After Death

When a will is “probated” the deceased’s assets are distributed to his or her named beneficiaries at the end of the probate process, often approximately one year after his or her death. The deceased has no control over what happens to the assets after they are distributed. However, a trust can include instructions such as “spendthrift provisions” and other restrictions on when and how the funds can be used. This is especially useful for grantors who have minor children they want to provide for after their death.

Asset Protections and Tax Advantages for Large Estates

Owners of larger estates also need to consider the tax consequences for their estate and their beneficiaries. Maryland levies a 10% inheritance tax on beneficiaries who are not the deceased’s closest family. In addition, there are state and federal estate taxes that are imposed on the assets depending on the size of the estate. However, trust assets are not part of the probate estate for tax purposes. If a trust is validly created and funded, it can shield the grantor’s assets from tax consequences when he or she passes away.

How to Set Up a Charitable Trust in Maryland

There are many advantages to establishing a trust instead of relying on a will and the Maryland probate process. To get the full legal and tax benefits of a trust, you need to work with a knowledgeable trust attorney like Henry Nash who can help you choose the right type of trust, and ensure it is set up correctly. For Maryland individuals and couples, The Law Office of Henry Nash can help you create an estate plan that provides for the people and causes most important to you. Contact us online or call (301) 681-6274 to schedule a consultation at our Rockville Office.