When people think of passing on assets after their death the first thing that comes to mind is a will. “I must have a will. If I don’t, my heirs could be denied their inheritance.” In the extreme, the Government could end up with all the money and assets. While these concerns are valid, there are ways to protect assets and ensure beneficiaries inherit all that’s coming to them. At the same time, those same “planning tools” benefit the living and provide tax incentives.
The difference between a will and a living trust is a kind of ‘apples and oranges,’ although when it comes to inheritance, the main difference is when the payouts to beneficiaries begin. While a will lays out your distribution wishes for after you die, a living trust becomes effective immediately. While you are alive you remain in charge of your trust’s funds and what gets doled out, when, and to which beneficiaries.
What is a Living Trust?
A living trust is a legal document created during an individual’s lifetime. It assigns a designated person, the trustee, with responsibility for managing assets for an eventual beneficiary. Living trusts protect the inheritance intentions of a person should they become incapacitated. Trusts are generally used as estate tools for substantial inheritances, but not always.
Revocable vs. Irrevocable Trust
Revocable trust and living trust are separate terms that describe the same thing.
- As with a will, terms can be changed at any time.
- The owner retains control over its assets.
- Assets are not shielded from creditors and can be liquidated to satisfy judgments.
- Upon the owner’s death, assets held in trust are subject to both state and federal estate taxes.
- Although Texas has no estate tax, the federal estate tax applies to estates over $5 million. A living trust will not avoid this tax.
- Beneficiaries must pay tax on income distributions.
- Cannot be modified after they are created without the consent of the beneficiaries.
- Must be fully funded and the amount cannot change, or the trust is void.
- Are taxed as a legally independent entity in much the same way as an individual taxpayer is taxed on income tax rates and available deductions.
- Treat income-earning property by the IRS as trust income, not personal income.
Wills and trusts are both estate planning tools. One leaves assets to beneficiaries after you die; the second helps to ensure that your assets are protected now and bequeathed to your heirs. You can have both. Your estate planning attorney can fully explain their benefits and which estate planning tools are right for you.
Trusts offer tax benefits and the funds in irrevocable trusts are protected from creditors. Also, wills are subject to probate, a process that can be lengthy and potentially contentious if family members contest the will. Trusts do not go through probate when the grantor dies and cannot be contested.
Contact Our Offices Today!
Let the experienced attorneys at The Voeller Law Firm suggest estate tools and create an estate plan that’s right for you. Call (210) 651-3851 now for a free planning consultation. The Voeller Law Firm, located at 19311, FM 2252, Suite 103, San Antonio, Texas 78266.