This was originally published on Monday, June 23, 2014, in the Pacific Daily News. Click here to subscribe to the PDN.
Question: I am starting to think about ways to protect and pass on my assets when I die. I am not sure if a trust or a will is suitable for me. Can you help me understand the difference between the two?
Answer: I applaud you for thinking about your heirs after you pass. A trust or a will is better than not having anything at all. What you choose depends on your situation, how much you have in assets, and how you want to pass along these assets.
There are several ways to guarantee your assets will be passed on to your heirs; you can leave a will or a trust. A trust is a legal entity that can be arranged to specify exactly how and when assets are passed on to the beneficiaries. It can put conditions on how the belongings are divided.
A trust does not replace a will and usually deals only with specific assets; unlike a will that deals with all assets in your estate. A trust has a trustee that oversees the entity. You can be the trustee until your death or you are incapable of performing the task. When that happens, a successor is usually named and the assets usually stay out of court.
Most of the time a trust is used if you have a sizable estate, at least a net worth of $100,000 and you want to decrease the amount of estate taxes or protect your assets from creditors or lawsuits. Trusts are more flexible than wills but usually cost more to set up and are more complicated. Because it is a lot more complicated than a will, using an attorney to set up the trust is necessary.
There are benefits to using trusts. A trust may lower gift and estate taxes, may provide protection from your heirs’ creditors and may prevent having to go to probate court when assets are passed. You can even protect your assets from beneficiaries who do not handle money well. Because minors cannot own property till they are 18, a trust can be set up for them. A trustee manages the property till the child is of age or meets your certain criteria. There are several types of trusts, the major differences are:
• Revocable trusts or a living trust can be revoked or dissolved, or you can change the terms of the trust at any time. Assets in a revocable trust are subject to estate taxes and are treated like any other asset even though the assets usually do not go through probate. A revocable trust usually becomes irrevocable upon the death of the grantor.
• Irrevocable trust usually cannot be changed or dissolved by the grantor once the trust is established. An irrevocable trust is preferred when wanting to reduce the amount of estate taxes when transferred.
Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at email@example.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.