Should I Choose a Will or Trust for My Estate Plan?
Devising a will is the most common way for people to state how their property should be distributed upon their passing. This device will describe the estate, the people receiving the property, and special instructions of how to care for minor children.
If an estate holder intends to gift property that has significantly increased in value, it is better to devise it through a will. Since the estate will be taxed on a stepped up basis, capital gains taxes will be more favorable if the property is later sold. Capital gains taxes will be priced at the fair market value at the time of the estate holder’s passing rather than the time they purchased the property. The beneficiary will therefore have much less to pay in capital gains taxes, then if the property was gifted through a trust.
However, because the property is probated, it can take over a year before the beneficiaries receive the estate. This process can be time consuming and costly in attorney fees. Furthermore, out of state property will also undergo the same process. Finally, records of the estate become public at the time of the grantor’s passing.
Trusts are another property management tolls used in estate planning. A property owner (grantor) will transfer legal ownership to a person or institution (trustee) to manage the property for another person (beneficiary). Upon the grantor’s passing, the trustee distributes the property to the beneficiaries.
There are numerous advantages of setting up a trust. First, because the probate process is avoided, beneficiaries receive the property quicker and without attorney fees. Second, the trust will manage the property distribution if the trustee becomes either physically or mentally incapacitated. Third, discretionary and spendthrift limitations can be imposed on beneficiaries who lack fiscal responsibilities. Fourth, estate taxes can be greatly reduced through annual gifts up to $11,000 using irrevocable trusts. Fifth, a grantor maintains more control of a gift than a will. For example, if the grantor does not care for his daughter-in-law, leaving the funds in a trust prevent her and the son from spending the principal. Furthermore, in most states, the daughter-in-law cannot receive any of the assets if she ever divorces the son.
However, trusts also have their drawbacks. First, unlike a will, it is more expensive to set up and fund. Second, property which has tremendously increased in value will be subject to the highest possible estate taxation because the cost basis is carried over from the grantor to the beneficiary. Third, there is no cut off date for creditors to bring a claim to the estate. Forth, grantors, cannot appoint guardians for minor children.
