When To Use A Will vs. A Trust

A Last Will and Testament and a trust are two of the most commonly used estate planning tools, but they are optimized for somewhat different goals. In this blog post, we discuss how wills work and how trusts work in the hope that this information can make choosing an estate planning approach a little easier.

How Wills Work

A Last Will and Testament (will) is the first document many people think of when they begin to consider developing their estate plans. Partly because “reading the will” makes for an easy set piece for staging dramatic revelations, wills have a long history of appearances in fictional narratives and enjoy a great deal of cultural recognition as a result.

Who Is Involved in a Will?

The poetic license allowed to fictional representations notwithstanding, most wills are by design unexciting documents, of interest primarily to these parties:

• Testator: The individual who creates a will to direct the final disposition of their estate
• Beneficiaries: Persons designated by the testator, in the will, to receive some portion of the estate
• Executor: Person named by testator to manage the probate process, satisfy any creditors of the estate, and distribute remaining assets to designated beneficiaries in accordance with the terms of the will

What Is Required for a Will To Be Valid in Ohio?

Laws governing what makes a Last Will and Testament legally valid vary state-by-state. In Ohio, most wills must be written documents, although O.R.C. § 2107.60 provides for an oral will to be transcribed from dictation under exceptional circumstances. Wills transcribed in this manner must be submitted for probate within three months of the testator’s death, underscoring the fact that individuals preparing their estate plans should not rely on oral dictation as their method for creating a valid will.

Wills Are Public Records

One common reason for preferring to transfer assets via a trust rather than in a will is that a will becomes public upon its admission to probate or the death of the testator. Ohio’s probate laws provide exceptionally strong privacy protections for wills during the lifetime of the testator. Once the testator has died, however, O.R.C. § 2107.08 requires that the will be turned over on demand to the person named on the sealed envelope in which it was delivered to the court, or to the probate court with jurisdiction over the will.

Even if no demand for the delivery of the will is made and the will has not already been validated by an Ohio probate court prior to the testator’s death pursuant to O.R.C. § 5817.02, the probate court that has custody of the document is required to open the will publicly within one month of receiving notice that the testator has died. Once the will has been opened in court, it is no longer subject to the privacy protections that applied during the testator’s lifetime, and the probate process itself, as a court proceeding, will be a matter of public record.

How Trusts Work

A trust is a legal entity established to hold assets. These assets are managed by a fiduciary known as the trustee, for the benefit of the trust’s beneficiaries (the same term used for the parties to whom a testator makes devises in a will), in accordance with the terms established by the trustor or grantor (either term may be used to indicate the party who forms the trust and places assets into it for management and safekeeping) in the trust instrument (the legal document that establishes the trust).

Two Main Types of Trust

Unlike wills, which are subject to essentially the same processes and requirements regardless of their contents or the specific directions given in them by the testator, trusts may be structured in a number of highly specialized ways to achieve an estate plan design carefully tailored to address the grantor’s personal concerns and priorities. No matter how exquisitely detailed the customization of the trust instrument may be, however, the specific set of advantages and disadvantages it offers will be based on its placement in one of two broad categories:

• Revocable trusts
• Irrevocable trusts

Revocable Trust Characteristics

The grantor of a revocable trust retains the right to alter beneficiary designations even after the trust has been formed and funded, much as a testator retains the right to update their Last Will and Testament – adding new beneficiaries, removing individuals they no longer wish to receive a portion of their estate, or changing the specific assets or items of personal property individual beneficiaries are designated to receive. A revocable trust also allows its grantor to withdraw assets, during their own lifetime, and typically for any use they see fit. Because the grantor has access to the funds in the trust, they are not protected from tax or creditors in the same way that assets in an irrevocable trust typically are.

Irrevocable Trust Characteristics

An irrevocable trust offers little recourse to a grantor who experiences a change of mind or heart after the trust instrument has been signed and the transfer of assets to the newly-formed legal entity has been completed. The grantor can no longer access those assets directly, although if the trust instrument names the grantor as one of the trust’s beneficiaries then they may still receive income or other benefits from the trust, as distributed by the trustee in accordance with whatever terms the grantor imposed on the trust during the creation of its founding document. The grantor of an irrevocable trust in most cases also cannot remove or alter beneficiary designations after the trust has been formed: Even if the individual who formed the trust later decides they no longer wish to leave any gift to a particular individual or organization with whom they have grown disenchanted, the beneficiary designations as originally established will typically remain in effect for the life of the trust.

Tax and Probate Implications of Revocable vs. Irrevocable Trusts

Given the much greater flexibility of revocable trusts compared with irrevocable ones, many individuals contemplating setting up a trust as part of their overall estate plan design naturally wonder why anyone would form an irrevocable trust in the first place. While the specific reasoning will depend on each grantor’s particular circumstances, in general the decision to choose an irrevocable trust comes down to the implications this type of trust has for tax and long-term care planning. Either type may, or may not, be preferred to a will for specific estate planning considerations.

Generally speaking, the assets contained in a revocable trust will be included in the individual’s estate for tax purposes – meaning that this type of trust, while offering greater flexibility than its irrevocable counterpart, will not provide much in the way of tax advantages for beneficiaries. A revocable trust may, however, be exempt from probate, according to the American Bar Association. An irrevocable trust typically avoids both probate and estate tax, but has the detraction of putting its assets beyond practical reach.

Choosing a Will vs. Trust: Key Factors To Consider

Individuals evaluating the benefits of a will vs. trust in choosing estate planning documents can keep the following factors in mind as they weigh their options:

• Wills: These documents provide clarity and precision. They can be an excellent means of transferring specific assets to individual beneficiaries through the probate process. The probate process itself tends – with exceptions – to be shorter and less complicated for smaller estates than for the estates of individuals with sprawling asset management requirements. Notably, a will cannot avoid estate tax – but as Ohio does not impose its own estate tax, estate tax may not be an issue in any case.
• Revocable trusts: Like wills, revocable trusts do not avoid estate tax, as the grantor’s access to them at the time of death will mean that these assets are included in the final tax return filed by the executor on behalf of the estate. However, unlike wills, the assets in a revocable trust can be passed directly to beneficiaries under the supervision of the trustee upon the grantor’s death, rather than going through probate. Revocable trusts therefore offer greater privacy than a will, and – as with a will – can be a good option for transferring assets promptly and discreetly after the grantor’s death. This type of trust can be ideal for transferring assets that require regular management and might therefore be burdensome during probate (such as some forms of real estate).
• Irrevocable trusts: This type of trust provides greater asset protection than either a revocable trust or a will. Like a revocable trust, an irrevocable trust is exempt from probate; unlike a revocable trust, it will also ensure that any assets held in the trust are protected from creditors during the grantor’s lifetime and excluded from the taxable estate after the grantor’s death. The loss of direct access to the assets included in an irrevocable trust can make this option less than appealing for some grantors, so you may wish to consider discussing your situation with an experienced estate planning attorney at Rhodium Law to seek perspective on whether there is a place for an irrevocable trust in your ideal estate plan design.

Balancing the Merits of a Will vs. Trust

In many instances, the most practical strategy may not be choosing a will vs. trust so much as deciding which estate planning priority each document should address. O.R.C. § 2107.63 makes specific provisions for individuals seeking to use at least one trust, in combination with a Last Will and Testament, to effect their overall estate plan design. Thus choosing estate planning documents may sometimes be less a question of choosing a will vs. trust and more a question of determining which combination of documents will best meet particular estate planning goals.

As a general rule, revocable trusts may be good options for transferring assets privately when there is little concern that the estate will meet the federal threshold for estate tax. Irrevocable trusts, despite their inconveniences, may be worth considering in situations where there is concern about estate tax liability or, on the other hand, concern that creditors may attempt to claim portions of the estate during the grantor’s lifetime. Wills do not avoid either estate taxes or the probate process, but can be highly effective vehicles for directing specific assets or items of personal property to individual beneficiaries in a streamlined manner.

Discuss Your Estate Plan Design With an Experienced Attorney

Although choosing estate planning documents can be a complicated process with multiple factors to consider, ultimately the most important questions to ask throughout the process are those centered around what you hope to achieve. A sound estate plan may incorporate several different types of documents, each one tailored to address a particular concern; in a truly effective estate plan design, all of the included documents are complementary to one another, and work together in support of a cohesive estate planning strategy.

If you are weighing the advantages of a will vs. trust for transferring assets to intended beneficiaries, or if you have other questions regarding estate plan design, consider reaching out to an experienced Ohio estate planning attorney to discuss your aims. Connect with Rhodium Law today by calling (216) 699-8145 to schedule your free consultation.