Which is Better for Estate Planning for High Net Worth Individuals: A Will or a Trust?

Estate planning is crucial for high net worth individuals who want to protect their assets and pass on their wealth to heirs. High net worth individuals generally have over $1 million in liquid assets that need to be properly accounted for in an estate plan¹. For these individuals, establishing either a will or a trust, or using both, can help ensure their wishes are carried out and assets are protected. This article examines the key differences between wills and trusts for high net worth estate planning.

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What is a Will?

A will is a legal document that lets you designate how your assets should be distributed after your death². It also allows you to name an estate executor to carry out your wishes, and a guardian for any minor children. Key benefits of a will include³:

• Simple and inexpensive to set up
• Lets you name guardians for minor children
• Allows you to designate asset distribution
• Can name an executor to carry out your wishes

However, wills have some downsides, including⁴:

• Assets must go through probate, which can be lengthy and costly
• Terms can be contested more easily
• Does not avoid estate taxes
• Does not protect assets if you become incapacitated

What is a Trust?

A trust is a legal arrangement where you transfer assets to be managed by a trustee for the benefit of your chosen beneficiaries⁵. Trusts avoid probate and provide more privacy than wills. Key benefits include⁶:

• Avoids probate for assets placed in the trust
• Harder to contest than a will
• Can manage assets if you become incapacitated
• Provides more control over distribution of assets
• Protects against creditors and lawsuits

Downsides of trusts include⁷:

• More expensive and complex to set up than a will
• Trust assets must be retitled in name of trust
• Requires giving up control of assets to trustee

For high net worth individuals, the benefits of avoiding probate and having much more control over asset distribution often make having a living trust the preferred option over just having a will⁸⁹.

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Using Both a Will and a Trust

Many estate planning experts recommend high net worth individuals have both a will and a living trust as part of their plan¹⁰. The will can cover any assets not captured in the trust, and name guardians for minor children. The trust becomes the main vehicle for distributing the bulk of the estate's high value assets. Having both ensures all assets are covered, avoiding complications.

Key Considerations for High Net Worth Individuals

Those with estates above the $12.92 million federal estate tax exemption need to implement strategies to minimize estate taxes where possible¹¹. Options include:

• Making annual exclusion gifts up to $16,000 per recipient
• Using life insurance held in an irrevocable life insurance trust
• Establishing charitable trusts as part of estate plan
• Using valuation discounts on assets such as family limited partnerships

High net worth individuals should also name trustees and beneficiaries carefully, use trusts to avoid family disputes, and regularly review their estate plan to account for changing tax laws or life circumstances.

Working with an experienced estate planning attorney is highly recommended to navigate all the options and ensure the optimal strategies are implemented.

References

1 https://www.investopedia.com/terms/h/hnwi.asp

2 https://www.investopedia.com/terms/l/last-will-and-testament.asp[3] https://www.nerdwallet.com/article/investing/estate-planning/living-trust-vs-will[4] https://www.ncoa.org/adviser/estate-planning/living-trust-vs-will/

5 https://www.investopedia.com/terms/t/trust.asp[6] https://www.rbcwealthmanagement.com/en-us/insights/will-vs-a-trust-which-one-is-right-for-you[7] https://www.nolo.com/legal-encyclopedia/making-living-trust-yourself-29736.html[8] https://premiertrust.com/2019/02/20/the-4-benefits-of-a-trust-over-a-will/

9 https://www.kiplinger.com/retirement/types-of-trusts-for-high-net-worth-estates

10 https://creativeplanning.com/insights/estate-planning/will-trust-both/

11 https://www.investopedia.com/articles/personal-finance/070715/quick-guide-highnetworth-estate-planning.asp

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Content provided herein is for informational purposes only and should not be considered legal or tax advice.  Estate planning isn’t a one-size-fits-all affair. Legal requirements vary by state and can significantly impact your estate plan.  You should consult legal counsel and/or tax professionals regarding your specific situation.