Wills vs Trusts vs Title

Putting in place important estate planning documents is critical to leaving your ideal legacy upon your death, and among the various estate planning documents are wills and trusts. However, many people confuse the differences between the two and the benefits they can provide, and whether or not they even need them at all.

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Hello, everyone, and welcome to the Retired-ish podcast, where we discuss all things retirement planning, taxes, financial planning, investing, estate planning, Medicare, Social Security, and more. I'm your host, Cameron Valadez, certified financial planner and enrolled agent. Today, we are going to discuss some of the key differences between two vital estate planning documents and how the titling of the assets that you may own fits into the equation.

Estate planning is quite a large field. Although there are many other important documents, planning, and considerations, today, we're going to limit the discussion to wills, trusts, and the titling of assets, and remember to always consult an attorney with your specific estate planning needs. Now before we get started, I just wanna note if you'd like more information on some of the more general concepts of estate planning, you could go back and listen to one of our previous episodes, which I will have a link to in the episode show notes available on our website, and you can access the link to the show notes right there on your podcast app. So I recommend going back and listening to that one first if some of these concepts are very new to you. Otherwise, let's dive in.

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Let's begin first by understanding why having these documents in place is important to begin with. The purpose of a will and or a trust is essentially to provide a legal mechanism for you to pass on your legacy, your wants, wishes, and financial assets or businesses to others upon your death. Now this could be for one or several reasons. It could be as simple as I want my spouse to receive this and my kids to receive this. It might be that you want your second spouse to be able to continue to use and live in your home after your death, but you want your children from your first marriage to inherit the home upon your and your second spouse's death. It might be that you have special needs family members or even a child who's a bit of a spendthrift, and you want to be sure there's a system and people in place to help manage the finances for them when you pass.

It could be to make sure that the family business passes effectively, or you may implement certain trusts for potential estate tax purposes. What have you. Everyone can have different reasons as to why they have structured their estate plan the way they have. There is no black-and-white reasoning. However, many people, especially those who listen to a podcast like this, typically have accumulated some significant level of financial assets, and a will and trust should be at least considered even if all you own is your home and I'll get into that a little bit later. If you were to die with nothing in place, there would be no guide or any direction for your family and your heirs. Your family members are likely to disagree about what you would have wanted, and what you actually would have liked to have happened may not actually happen. Even worse, your dying can actually start the unwinding of lifetime family relationships, which I'm sure isn't something that anybody wants, especially you. In these cases, your legacy becomes whatever your heirs end up experiencing after you pass, which might involve years of disputes, creditors, lawsuits, judgments, legal fees, court, etcetera.

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Without any documents in place, your state law may determine how things play out in what is called probate, which is a public and oftentimes time-consuming and expensive process for your heirs. Now, you may say, hey, I don't care. That's their problem. I'll be gone. But how would you feel if I told you that tens, if not 100’s, of 1,000’s of dollars you spent your whole entire life accumulating will be lost to unnecessary expenses after your death? I bet that you'd be rolling over in your grave. In that case, by planning early and setting things up according to your wants and wishes and communicating those wants and wishes to your heirs, it's more likely that the financial assets you leave behind are used or invested wisely rather than squandered and wasted.

So now that you understand why these estate planning documents are so important, let's get into the first document, which is a simple will. Think of it this way. A will essentially answers two questions, and those are who and what. It is a legal document you create while you're alive that can outline several things. Some of the most common is the naming of an executor of your estate. This is essentially the person who will be responsible for gathering up information, reading your will, and settling your estate to pay bills and distribute property. The next common thing is naming a guardian for any minor children you may have. So if you die rather prematurely with minor children, you're going to want to name someone to legally take on your children. Another is making specific bequests of things that you own that you don't necessarily pass via title or some sort of beneficiary designation.

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Think who gets the fine China ware in the house? Who takes care of the pets? Who gets the $700 spaceship-looking vacuum that you bought 10 years ago, the art on the walls in your house, the stuff in the storage unit, antique furniture, etcetera? A will can actually be created in several ways. However, there are some significant risks if not done correctly. Now, again, I'm not an attorney, so I won't get exactly into how to execute your will, but just know that simply writing these things down on a piece of paper and putting it in your safe may not accomplish what you think it will at the end of the day. Therefore, it's best to consult an attorney to be sure it's done appropriately. It's also a good idea to consult a professional so that it doesn't get lost. You can scour the Internet right now for obscure stories about how wills were lost and never found, even from some really prominent celebrities or cases where they were found months later in a couch cushion. When working with professionals such as attorneys and financial planners, there's likely to be a backup copy saved or stored somewhere. While a will can serve several important purposes, there are many things it won't do. Remember, it answers who and what.

That being said, here are some other key things to know about having only a will. The first is that they do not help your heirs avoid probate, and this is a big one. In fact, they will likely serve as, the will that is, will likely serve as a set of instructions for a judge to make sense of and carry out in probate.
Next is, your affairs will be public record. Your will and the value of your estate, so the things you leave behind, those become public records. This can open up the door for estranged family members, creditors, etcetera, showing up and trying to walk away with something or possibly contesting the validity of the will itself.

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That's why I mentioned before. It might not be a good idea that you just kind of write stuff on a piece of paper and stow it away. The next is the title of property or beneficiary designations will actually supersede a will most of the time. We'll talk about it a little bit later, but if you have some kind of account and there is a beneficiary labeled on it that's different than the person you wrote in your will that you wanted to get your things, likely, the one that is named the beneficiary on the actual account is going to be the one that gets the money in that account. And lastly, a will can't necessarily answer the questions of when and how will financial assets and other assets be used after your death.

So what does answer the questions when and how? In comes the use of a trust. A trust is a legal document separate from a will that can answer the questions of when and how can my financial legacy be used, if you want to put those restrictions on there, in addition to who and what. Using a trust, you and an attorney can write in specific language of how you want things to go. This is often referred to as control from the grave.

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Now it's important to know that there are many different types of trusts that are used for very specific reasons. So some of those reasons I alluded to earlier, but there are also many more used for business and charitable endeavors, just to name a few. Today, I want to narrow our focus to the generalities of what are called revocable living trusts, which are sometimes referred to as family trusts, and general irrevocable trusts. Other than providing a level of control after you're gone, trusts can provide many other benefits.

One of the most notable compared to something like a will is that assets that pass via a trust generally avoid probate, and matters are kept private. This can save your beneficiaries a tremendous amount of time, headache, and money at the end of the day. Trust can also make it easier to equalize inheritances among many beneficiaries if desired and allow your trustee to pass certain assets in a more efficient manner. Think family businesses, especially if you're a medical professional with an S Corporation.

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Think cryptocurrency, wallets and keys, guns, pets, etcetera. The language that you put into your trust can allow you to delay ownership of a particular financial asset for a beneficiary into the future or even in phases. Right? So, for example, you can have children and say that, okay, they are to be able to use 30% of this money at age 25, another 30% at age 30, and you can even say what they're able to use the money for, and you get to customize all of this language.

This is often helpful if one or more of your beneficiaries could still be minors when you pass, or maybe they're spend thrifts. On the flip side, trust can also be created and managed after your passing to take care of special needs beneficiaries who may not be able to handle finances on their own. These trusts are also typically set up in order to preserve any public benefits that they might be receiving, even if they were to receive a financial windfall from you upon your passing. Trusts can also be particularly useful for those of you with a blended family structure and there are children from separate marriages. This is because most people want to support their spouse in the event of their passing, but they might not want to disinherit their children from their first marriage. As I said, there are many things a trust can be used for, but these are just some of the more common uses.

Okay, so what's the difference between a revocable living trust, like I mentioned earlier, and an irrevocable trust? Well, a revocable living trust is one that you create while you're alive. Most often, it is designed and executed alongside a will. They kinda work together. You are what is called the grantor or creator of your trust. Those are the technical terms. And while you're alive, you're also typically what we call the trustee of your own trust. And what you do is you name beneficiaries of your trust, and via all the language and verbiage in the trust, you answer the who, what, when, and how. When you are the trustee of your own trust while living, you can put money and assets into the trust as needed or even take things back out.

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While living, your revocable living trust is flexible. It's revocable. It's sort of like an extension of you. You can amend it or change it however often you want and pretty much use it as you please. You don't need to file a separate tax return for it, nor do you need any federal tax identification number for it. You can open a bank account in the name of the trust or an investment account and put money in or take money out as you please. You can also change the title of your home or other property to be in the name of the trust. A revocable living trust does not provide any tax benefits to you or your heirs, nor does it give you much in the way of actual asset protection.

Many people I talk to have this misconception that if they just get a trust made or a revocable trust made, they will get some sort of tax benefits or be able to shield all of their assets from potential creditors, which isn't necessarily true. Again, it's a common vehicle or mechanism to transfer assets at death. We're talking about revocable living trusts still here. When you pass, only the assets that were actually titled, or in other words, placed into the trust, will pass according to the language in the trust. If certain assets are left out or forgotten about and things aren't structured appropriately, those assets may be left subject to probate and some of the other pitfalls I discussed earlier. So as I mentioned before, for some, depending on where you live, even if the only financial asset you owned was maybe your home, it still may make sense to have a trust, even if the only thing in it might be the home and maybe potentially a bank account.

For example, if you live in California and you have a home that's worth $500,000 or more, if that goes to probate, the fees could be fairly substantial when combined with all of the other legal fees your beneficiaries may pay. In addition, if, say, you have two children, and you want them to split their inheritance 50/50, and you have the home in your trust, and that's it, one might want to keep the home and live in it while the other may want to rent it out or sell it.

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This could lead to arguments, which could lead to ruined relationships within the family, so to help mitigate the risk of this issue, putting specific language in your trust to dictate what they can do with the property can definitely help as well as help avoid probate.

So now, let's switch gears and talk about irrevocable trusts. So when it comes to irrevocable trusts, things are quite different. While irrevocable trusts share some of the same traits as revocable trusts in that they, too, are trusts, they are set up during your lifetime primarily for different reasons, and just a side note, they actually can come into place at your death as well, but I'm referring to an irrevocable trust that you make during your lifetime. I say this because if you have a revocable living trust, and then pass away, that trust actually then becomes irrevocable, meaning it can't be changed, which is typically a good thing. That's what you want. But, again, I will be referring to irrevocable trusts you create while alive, not after death.

Now the main difference between these trusts and revocable living trusts is that what you put into them is essentially an irrevocable or permanent gift that you're making to the trust, which is going to be a separate entity from you. Therefore, what you put in, you don't technically own anymore. You have given it to a different entity that often has its own federal tax ID and sometimes its own tax return. Irrevocable trusts aren't an extension of you in the same way that revocable trusts are. You still get to create them and design them and put certain language in them, but you typically give up the use of the assets that you put inside them depending on the exact structure. And, again, depending on the structure, they can add a lot of actual revocable living trust, which typically doesn't provide much of anything in the way of asset protection.

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So then, what's the point? Why would somebody even use an irrevocable trust? Well, the primary reason an irrevocable trust might be set up during your lifetime is to mitigate or avoid estate taxes by trying to get assets out of your taxable estate. These estate taxes are separate from the income taxes you're used to paying and talking about. The estate taxes only come into play if the value of your estate, the things you own, is over a certain threshold.

Currently, that threshold for the federal estate tax is around $27,000,000 for a married couple. Currently, most people don't need to worry about federal estate taxes, but please keep in mind that just because you may be under the federal estate tax level, the state in which you live may have its own estate tax, and the thresholds can be much, much lower than the federal amounts.

When it comes to the federal exemption amount, that 27,000,000 or so, be careful because currently, that amount is scheduled to reset back down to pre-2018 figures, which are more in the neighborhood of 10 to 12,000,000 per couple unless Congress changes things before then.
So even if you and your spouse have, let's say, $4,000,000 in net worth in your fifties, or you're in your sixties, there's still a chance that if the laws revert or Congress lowers the amount to some other amount, there's a chance that your net worth or the value of your estate could grow beyond those exemption amounts by the time you're in your eighties, let's say. Again, you can't just look at one period of time. You have to look at, hey, what are the chances that my estate eventually gets above some of these levels? And if you notice or realize that that is a possibility, then you're gonna wanna do something about it.

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Okay. So as opposed to revocable living trusts, irrevocable trusts can actually have tax ramifications. Many of the tax benefits are due to mitigating estate taxes, like I mentioned, or even mitigating capital gains taxes when selling a capital asset, like stocks or properties or what have you. You can mitigate capital gains taxes on those sales when certain charitable trusts are used. Irrevocable trusts can potentially have negative tax ramifications for beneficiaries in some instances, such as potentially losing a step up in cost basis on inherited investments. We talked about that a little bit on a previous podcast about estate planning.

In addition, if an irrevocable trust is generating income, maybe from an investment of some sort, and that income is not distributed annually out to the beneficiaries, the trust has to pay its own tax on the money. Again, if that income stays in the trust and is not sent out to a beneficiary, the trust generally pays taxes on it, and in many situations, it is better if the beneficiary pays the taxes, not the trust because trusts have more compressed tax brackets, and what that means is it only takes a relatively small amount of income to get to the highest tax bracket of nearly 40%. Trusts and taxation is an extremely complex area, and tax and legal professionals should definitely be consulted if you have this situation. Just know that there could be strategies to utilize when it comes to how you structured your estate plan and what beneficiaries might receive after taxes since that's all that matters at the end of the day.

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Okay, that all sounds good, but what happens if I don't currently have a trust or I don't ever get one done? Where does all my stuff go? What happens with it? Well, while estate planning documents are important, no question, they aren't required. Some types of assets can still pass to a spouse or heirs or other beneficiary and even avoid probate depending on exactly what they are, how they are titled, and if there are any named beneficiaries on the account documents or contract.

Most financial assets have ways in which they are titled or owned. For example, real property title is taken with a deed, and there are various ways to hold that deed, whether it be just in your name alone, maybe joint with a spouse or titled in trust, or even an LLC, for example. It might also matter whether or not that property is in a community property state and when and how you took ownership of it. Then there are things like bank accounts and investment accounts that can work in very similar ways. You might have accounts in your name, joint with someone else, or in trust, etcetera. With these types of nonretirement assets, how they are titled and if there are beneficiaries listed will ultimately determine how that property or that account passes.

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For example, if you have a brokerage account with stocks and bonds in it, in cash maybe, held jointly by you and your spouse with rights of survivorship, If something happens to you, your spouse will automatically take ownership and vice versa. Generally, no probate is required or any hoops to jump through. However, if something were to happen to you and your spouse simultaneously and there are no beneficiaries named on the account, then it will likely end up in probate. Obviously, the antique furniture you have doesn't have any registration or title. So in cases like that, a will or trust or a combination of the two might be the way to go. Then there are retirement accounts such as 401(k)s, IRAs, Roth IRAs, and the like, in which there can only be one owner, you. These types of accounts pass by using a beneficiary designation. If no beneficiaries are listed on these accounts, the account will typically pass to your estate, and your heirs may have to go through the probate process. Even if you have a revocable living trust, you don't put these retirement accounts in the trust or change the title to the trust because they can only be owned by you.

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In this case, the beneficiary designations you set up will generally supersede any will or trust that you have. However, there are ways you can have the trust take on the retirement accounts after your death for certain reasons, but that's beyond the scope of today's discussion. As you can see, the titling of an asset can be even more important than having a simple will or trust, even naming a beneficiary. Even if you do have a will or a trust, or both, don't neglect proper titling and beneficiary designations on your assets. Remember, your trust will only work, the language in it, if the assets are in the name of the trust when all is said and done or if you have something like a pour-over will in place that can help get assets into the trust upon your death.

The main difference between relying on the titling of an asset or a beneficiary designation and the use of something like a trust is that without a trust, you generally have little control over the when and how. Whoever inherits that particular asset will, in general, be able to use that money as they please. Making mistakes with titling and beneficiary designations can call for very costly mistakes that your would-be beneficiaries ultimately suffer from.

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Although you don't need a will or trust to simply pass assets, a proper combination of estate planning documents and titling and a well-executed plan can help your family keep more of your hard-earned money.

Hopefully, this was helpful. If you find the information and strategies I provide on the show actionable, valuable, and insightful, Please do yourself a favor and subscribe to or follow the show on your podcast app and share it with a friend who you think might benefit. And while you're at it, do yourself another favor and sign up for the Retired-ish newsletter to get more useful and easy-to-digest information on retirement planning, investing, and taxes, and more once a month straight to your inbox, no spam.

Of course, if you wanna learn more about the topics I went over in today's episode or you wanna connect with us to get a second opinion on your current estate planning situation, you can find links to the resources we have provided in the show notes right there on your podcast app, or you can visit us at retiredishpodcast.com/50. Thanks again for tuning in and following along. See you next time on Retired-ish.

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