Question: What are the advantages and disadvantages of having a trust instead of a will?
Answer: Trusts enable the grantor (the person creating and funding the trust) to determine who receives the money, when they receive it, and what conditions must be met. The pros and cons of trusts depend on whether it is a living trust or a testamentary trust. A living trust is set up during the grantor’s life, while a testamentary trust takes effect upon the grantor’s death. A living trust can be either revocable (grantor has power to revest title in himself/herself) or irrevocable (grantor did not reserve the power to revoke the trust). Note that a revocable trust generally becomes irrevocable upon the death of the grantor.
The most-touted advantage of a living trust is a substantial tax benefit to the grantor. Assets placed in an irrevocable living trust are not attributable to the grantor, although the trust itself may be taxed. Estate taxes also may be avoided. Revocable living trusts are sometimes used to help eliminate the issue that arises when certain entities (such as title insurance companies in some states) will only recognize Durable Powers of Attorney for a limited period of time after they are executed. Other advantages cover both revocable and irrevocable living trusts. If a living trust covers all of the grantor’s assets, then he or she may not even need a will. Many people wish to spare their relatives from going through probate, and living trust assets are not subject to probate. Because there is no probate, survivors do not have to reveal the extent of the living trust’s assets through a public filing as happens with probate. If the grantor holds real estate in more than one state, a living trust covering that property may allow survivors to avoid probate in those states. Aside from the advantages for the survivors, a living trust can help a grantor manage his or her financial affairs because a trustee takes over the administration of the trust’s assets. Some people are particularly concerned about how their finances will be managed if they should fall ill. A living trust may provide peace of mind because a trustee can continue to manage the trust’s funds in the event the grantor becomes mentally or physically incapacitated.
In some cases, a disadvantage of a living trust is that this trust becomes effective upon creation instead of at the grantor’s death. Although a revocable living trust remains terminable at the will of the grantor, while the trust is in effect, the terms of the trust control.
The major advantage of a testamentary trust is that the grantor retains control over his or her assets. Because a testamentary trust becomes effective only upon the grantor’s death, the grantor may make changes to its terms any time before death. For many people, retaining control of their property is an important goal that testamentary trusts help them achieve. Retaining control can have its disadvantages, though. If the grantor becomes incapacitated prior to death, the trustee cannot take charge of the trust assets in order to manage the grantor’s finances during that time. A guardianship may be required for such incapacitated grantors. Another drawback is that survivors must probate the testamentary trust.