Let’s face it, it is the rare person who likes to discuss end of life planning. But not talking about it does not change the reality that we are all mortal and our time will come. As wryly put in a Kenny Chesney song, “everyone wants to go to Heaven but no one wants to go now!” Part of any end of life planning is what happens to our money, property, and stuff. When it comes to the distribution of our assets, most of us have certain individuals in mind. If you know anything about estate planning, you have likely heard of a Will and a Trust; but how are they different and what can they do for you?
The biggest difference between a Will and a Trust is that a Will is a set of instructions about how your assets are distributed only after your death and in a legal proceeding called probate. A Trust allows you or someone whom you designate as a legal representative (your “Trustee) to use your wealth as instructed by you while you are still alive. In other words, and simply put, a Trust is very much like a Will that begins while you are alive and after your death seamlessly becomes your Will substitute.
While there are many different types of Trusts and each one goes into effect as soon as they have been set up. Some Trusts need a separate Tax ID number and are treated similar to a business in that they have both expenses and income and have their own income tax returns. But most of the Trusts we use for estate planning purposes are known as Revocable Living Trusts. These Trusts typically use the Social Security number of one of the parties who established it (“Grantor(s)) and there is no separate tax return or tax treatment for a Living Trust while the Grantors are alive.
Other types of Trusts are known as Irrevocable Trusts. These are the Trusts that need their own tax ID number immediately. Once an Irrevocable trust is set up, you may not change the use of the assets listed therein. Alternately, you may make changes to a Revocable Living Trust at any time. Upon the death of both Grantors of a Revocable Living Trust that Trust becomes an Irrevocable Trust and cannot be changed and for the first time needs its own tax ID number and has its own tax filing requirements.
All Trusts have a Trustee; someone who is legally authorized to manage the assets in your Trust. You may name someone else as a Trustee for the life of the Trust, or you may name yourself as the Trustee while you are alive and name someone else as the Trustee upon your death or disability or to serve with you as a Co-Trustee. Trusts are also better for issuing your assets to family members in non-traditional families (e.g. an unmarried domestic partner).
Unfortunately, Revocable Living Trusts cannot help to protect your assets from creditors or from estate tax, although some tax planning can be done in certain cases. Although Virginia does not have its own estate tax, federal estate taxes still apply. But luckily, as a result of the Tax Cuts and Jobs Act, more than $11 million are exempt from the estate tax, so most people will not have to worry about it.
Creating a Will-based plan is generally easier than setting up a Trust. However, as mentioned Wills must go through a legal process known as probate, where a court validate the Will and supervises the administration process. It can be both time-consuming and expensive. No one may receive any of your assets until your Will has gotten to a certain point in the probate process which may take several months. It is also important to note that Wills offer less privacy than Trusts, as many of the terms of your Will must be made public during the process. (Trusts are not subject to probate.) I have had a number of clients who just knew their nosy neighbor was going to be at the courthouse to find out what they had and who got what!
Reilly Law PLC Can Help
When deciding whether to set up a Trust or to write a Will in Virginia, it is always a safer option to consult with an attorney who understands all about Wills and Trusts and who can help you to decide which is best for your specific goals and circumstances. If you or a loved one is in need of a Will or Trust, Reilly Law PLC can help to make your wishes a reality. To learn more about Wills, Trusts, and estate planning (or as we prefer to call it Peace of Mind Planning), or to schedule a consultation, contact us today!