Wills versus Revocable Living Trusts

Wills versus Revocable Living Trusts

There are two different documents used to plan the distribution of a person’s assets after death: the Will and the Revocable Living Trust. It is commonly believed that Revocable Living Trust is better for avoiding estate (death) taxes and for avoiding creditors. Neither of these things is true.

A Revocable Living Trust is neither better nor worse for avoiding estate taxes than a Will. Anything that can be done in a Revocable Living Trust to avoid estate taxes can also be done in a Will. This misconception probably arises from the fact that trusts are often used to avoid paying estate taxes (such as disclaimer trusts, charitable remainder trusts and Crummy trusts). But just as these trusts can be created inside of a Revocable Living Trust, they can also be created inside of a Will. (Trusts that are built into Will are called “testamentary trusts” and are very common.)

Nor is a Revocable Living Trust any better for avoiding creditors than a Will. Neither, in fact, avoids creditors. Creditors have a period of time after a person’s death to make a claim on the decedent’s estate, and if the creditor’s claim is valid and there is sufficient money in the estate, the claim will be paid. Also, creditors can attach assets that are held in the name of a Revocable Living Trust during the trustor’s lifetime, just as they can attach assets held in a creditor’s name.

Revocable Living Trusts are not without their advantages, however. They do not have to be probated (filed with the court), which means distribution often occurs sooner than with a Will and with less cost.

The disadvantages of Revocable Living Trusts are that they cost significantly more than a simple Will (a Will without tax planning) and are more complicated because assets need to be transferred to the trust. Finally, even with a Revocable Living Trust there is still a need for a Will, called a “Pour-over Will.”

Whether you get a Will or a Revocable Living Trust, you will be way ahead of most people, who have no estate planning documents of any kind.