I cannot tell you the number of times I have had people as if it is better to have a will or a trust.  I probably stopped counting when the 10,000th person asked me, and I have moved well beyond that number at this point.

The simple, yet unsatisfying answer to the question of whether it is better to have a will or a trust is that it depends on your situation and what you are trying to accomplish.

I know this answer isn’t what a lot of people want to hear, but it is the correct one.  This answer is also generally one that I cannot decide for you, as the answer is one you need to decide for yourself.  I can help you understand the advantages and disadvantages to each approach, but I cannot make the decision for you.

One of the big considerations that go into a trust are the assets that you have, both the type of assets and the amount.  Most people that I work with have a house, and perhaps some savings, or a retirement account.  If your assets are of a certain type, or amount, then the assets may dictate that a trust has certain advantages over a will.  Sometimes people want to put assets into a trust to avoid taxes.  While trusts are useful for lots of things, given the current tax rules, estate tax planning is now less of a concern for most people.

 

The type of trust you may need is also key in accomplishing your goals.

Different people have different goals in setting up a trust, and not all trust are the same.  Depending on what you are trying to accomplish, a trust may be quite useful and helpful.  Many people think that trusts are a “silver bullet” and can solve all of their problems, or address all their concerns in one document.  As much as I wish that were true, it is not.  Many people have misconceptions on what a trust can do, or cannot do, so I will try to dispel some misconceptions in this blog.

 

Your Assets May Dictate What You Can (or Should) Do

With these types of assets, a will may be enough to accomplish the transfer of assets.  Most people I meet have a fairly normal asset picture.  They have worked their whole lives, paid off a house, and have some savings, or some investments, possibly life insurance, and likely have money in a retirement plan.  Using just a will results in the will going through probate, and many people want to avoid probate.  There are different ways to avoid probate and using a trust is only one method.

The retirement plans will have a beneficiary designation that transfers assets outside of probate.  The same is trust of life insurance – life insurance policies have beneficiary designations that allow payouts to occur outside of probate.  A bank account can have a beneficiary designation that allows money in the bank account to be distributed outside of probate.  Even a house can be set up with a beneficiary’s deed to avoid the probate process.  The beneficiary’s deed is tied to an individual house, meaning it would need to be changed if someone moved.  However, not everyone needs to avoid probate, or wants to avoid probate.

I will usually discuss with a potential client how a will could be sufficient for most people in this situation, especially if probate would be relatively simple.  Probate in Colorado is decently straightforward to accomplish, and can be done by using the proper forms.  You can find the necessary forms for probate online, by going to the self help probate forms on the Colroado Judicial Branch website.  If you want to avoid probate, you can definitely use a trust to do so.  If you have assets in different states, and want to avoid probate in all of the states where you have assets, then a trust can help accomplish that for you.  A trust can also help consolidate everything in one spot, making it easier for your survivors to handle your estate.  If all of your assets are owned by a trust and everything flows to that one spot, then your assets can be distributed from that one spot and that makes life easier for your survivors.  Everything depends on what your assets are and what you want to do with those assets.

 

Trusts Don’t Solve Everything, and May Not Avoid Taxes

One of the big things that people ask me, well more tell me, about trusts is that they want to set up a trust to avoid taxes.  I think this goes back to several years ago, when estate taxes had much lower limits than the current estate tax exemption limit.  Over a decade ago, the estate tax limit was established at $1,000,000.  This meant that everything over $1,000,000 would be subject to estate tax.

A very popular tax strategy was to separate assets of a married couple into two separate trusts, so that each trust was below the estate tax limit, and taxes would be lessened.  That worked quite well when that was the rule.  However, the current estate tax limit is $11,700,000 per person, or $23,400,000 per couple.  I don’t meet too many people who have over $23,400,000, so this type of tax planning is less of an issue under the current tax laws.  While a trust may be useful for lots of things like avoiding probate, controlling money after someone has passed away, or consolidating assets, saving money on taxes is not a concern for most people.  A will may have the same tax consequences as a trust.

Certainly there are some tax advantages to certain types of trust for the wealthy, but those do not apply to most of the population, like me (and likely you!).  Those of us who have a normal amount of assets are more concerned about income taxes than estate taxes, and we need to be concerned about income taxes from retirement accounts.  In December 2019, the United States Congress passed the SECURE act, which changed the rules on retirement accounts being passed on after someone dies.  The old rule was that retirement accounts could be passed on to kids, and stretched out over the kids’ lifetimes.  The new rule says that retirement accounts need to be paid out over 10 years.  This means that you need to plan for how retirement accounts will be passed on to kids.  If you want to use a trust, you need to be careful in how you plan to keep tax rates as low as possible.  Naming a trust as a beneficiary of a retirement plan might result in higher taxes without proper planning.  If you want to know about planning like this, it is best to talk to an estate planning attorney who can help explain the options available to you.

 

Different Types of Trusts Accomplish Different Goals

I often have people who tell me they are all set with their estate plan because they have set up a trust, and their assets are protected from any and all creditors, including future medical expenses.  When I look at the trust they have, the trust is often set up as a revocable trust.  A revocable trust does not provide protection from creditors or from future medical costs under Colorado law.  Instead, if you are trying to protect assets, you will need to set up an asset protection trust – usually an irrevocable trust that separates you from your assets.  This type of trust is a specialized trust, and comes with its own benefits and drawbacks.

In order to get asset protection, you usually need to give up control over your assets.  Many times this means turning over control of assets to kids, or someone else you trust, to protect the assets from creditors or future medical expenses.  Asset protection from creditors is possible only if a debt does not yet exist – or the event that would result in a debt has not yet occurred.  You cannot simply transfer assets into an asset protection trust and expect assets to be protected from past or current creditors.  Future medical expenses, especially if paid for my Medicaid, usually have a 5 year look back period.

This means that you need to move assets out of your name more than 5 years before you apply for Medicaid, or else those assets will count against you.  If you gave away assets, and received nothing – or a reduced value – in return, within 5 years of applying for Medicaid, you could be subject to a penalty period.  The timing issues are important and need to be considered in setting up this type of trust.  Often this type of trust is best established later in life, after houses are paid off, and when direct control of assets is less of an issue.  These specialized trusts should be set up by an experienced estate planning attorney, and the protection they offer is not available if you simply set up a will, or a revocable trust.

 

Choose the Right Approach for You

You may not be in a position where you need an asset protection trust and if that is the case you don’t need to set one up or pay for one!  You may not need to worry about taxes nearly as much as you thought you did.  Certainly we all want to pay as little in taxes as possible, but a trust may, or may not, be helpful and useful in such a situation.  You may also not need a trust based on your assets, and what you want to do with the assets.  The decision about whether you need just a will, or if a trust would be helpful is one that you need to make for yourself.  I can help you see the advantages and disadvantages of each approach, but I do so on an individual basis.  If you would like to make an appointment to discuss your unique situation, and whether or not you need a will or a trust, you can do so by going here.