Which Is Better For Federal Employees: Wills Or Trusts?

Retirement planning can be challenging for anyone, but as a federal employee, you may have additional benefits to add to the mix that can, at first be overwhelming when planning for the future, but beneficial to you in the long run.

Federal employees likely have questions when it comes to planning for retirement. For example, is it better for federal employees to have a will or a trust? If the latter, what are the differences between revocable and irrevocable trusts, and which one is better? And how do federal employee benefits tie into this decision as it relates to their Social Security benefits, Thrift Savings Plan (TSP), Federal Employees Retirement System (FERS) and annuities? And which federal employees' assets should be placed in a trust?

Wills vs. Trusts

When considering the future, wills and trusts are powerful tools to help individuals control what will happen to your assets. Understanding the differences between wills and trusts and the ability to leverage each type of estate planning document in New York state will equip you with the knowledge you need to create a comprehensive estate plan.

Both of these legal documents serve important roles in distributing assets and protecting your legacy, but differ significantly in their purpose, function, and legal implications.

Purpose and function: A will is a legal document that outlines how a person's assets will be distributed after their death. It also allows for the appointment of guardians for minor children. A trust is a legal arrangement where a trustee holds and manages assets on behalf of beneficiaries, often taking effect during the grantor's lifetime.

Wills

Purpose and function: A will is a legal document that outlines how a person's assets will be distributed after their death. It also allows for the appointment of guardians for minor children. A trust is a legal arrangement where a trustee holds and manages assets on behalf of beneficiaries, often taking effect during the grantor's lifetime.

Probate process: A will must go through probate court, also known as the Surrogate's Court in New York, where the court oversees the asset distribution process. This process can be time-consuming and expensive. In contrast, assets in a trust bypass the probate process, providing a faster and more efficient transfer of property.

Privacy considerations: Wills are part of the public record after probate, meaning anyone can access them. Trusts, however, remain private, providing confidentiality in the distribution of your assets.

Trusts

At their cores, both revocable and irrevocable trusts are estate planning tools designed to hold and distribute assets, ideally while avoiding the probate process. But their legal structure and implications differ for federal employees in important ways.

Revocable Trusts

A revocable trust is a trust that allows the grantor to retain full control; modifying terms, adding or removing assets, and even dissolving the trust entirely during their lifetime if necessary. It becomes irrevocable only upon the grantor's death or incapacity.

A revocable trust is popular because it allows you to retain control over your assets while simplifying asset transfers after death. It avoids probate, maintains privacy, and provides for continuous management if you become incapacitated. You can amend or revoke it at any time.

Unfortunately, a revocable trust doesn't shield assets from creditors or reduce estate taxes. Since the assets remain in your control, they're still considered part of your taxable estate and are subject to estate taxes at death.

This type of living trust is best for flexibility, not asset protection or tax savings.

Irrevocable Trusts

You might consider creating an irrevocable trust if your primary goals include asset protection, reducing estate taxes, or qualifying for needs-based benefits like Medicaid. These trusts are frequently used in high-value estates, for special needs planning, or when shielding assets from lawsuits is a concern.

Common examples include setting aside college funds for grandchildren, funding a special needs trust for a disabled adult child, or transferring life insurance to an Irrevocable Life Insurance Trust (ILIT) to keep death benefits outside the estate. They are also useful in Medicaid planning to protect the family home while preserving eligibility.

While these structures limit flexibility, you can use an irrevocable trust as part of highly specific, purpose-driven strategies.

Can You Change or Terminate an Irrevocable Trust?

While irrevocable trusts are designed to be permanent, limited changes may be possible. Under New York law and many other states, modifications can occur through court approval or with consent from all beneficiaries, depending on the trust's terms.

In some states, including New York, techniques like decanting allow the trustee to transfer assets from an outdated trust into a new one with more appropriate terms. Courts may also permit changes when the original trust no longer serves its intended purpose.

While flexibility is limited, statutes and legal precedents have evolved to allow adjustments in certain cases, especially when supported by experienced legal counsel.

What Assets Should Be Place in a Trust?

Trusts are legal arrangements where a designated trustee holds and manages assets for the owner's designated beneficiaries. A fundamental component of estate planning trusts can help to enable wealth management and distribution during life and after you are gone. Determining which assets to place in a trust significantly influence your estate plan's effectiveness and ease of transfer to beneficiaries.

Common assets to place in a trust include:

• real estate (primary residence, vacation homes and/or investment properties;
• checking, savings and investment accounts;
• stocks; and
• LLC and/or partnership interests.

Impact of FERS, Social Security, TSP

The Federal Employees Retirement System (FERS) Basic Benefit Plan is a defined benefit plan that most federal employees are automatically enrolled in and provides a monthly annuity based on the employee's years of service, salary, and retirement age. Federal employees should be aware that if they are over 62 and have 20 years of service, they are eligible for a higher pension than, say if they retired at a younger age.

As part of FERS, federal employees participate in the Social Security program, making regular contributions from their earnings to qualify for benefits such as retirement, disability, and survivor benefits.

The Thrift Savings Plan (TSP) is a voluntary defined contribution plan that allows employees to contribute a portion of their salary to a tax-advantaged retirement account, with the option to receive agency automatic and matching contributions.

It should also be noted that under certain conditions, such as during a reduction in force (RIF) situation, workforce restructuring or under special provisions, employees may be eligible for early retirement, allowing them to begin receiving benefits before reaching the standard retirement age, depending on your particular circumstance. If this is the case, it is advisable to speak directly with you agency.

Impact of VERA

Finally, as federal employees may be aware, the Deferred Resignation Program, introduced in 2025, expanded eligibility for Voluntary Early Retirement Authority (VERA) and Discontinued Service Retirement (DSR). Both require either age 50 with 20 years of service or any age with 25 years.

According to the Office of Personnel Management, VERA allows agencies undergoing "substantial restructuring, reshaping, downsizing, transfer of function, or reorganization" to temporarily lower the age and service requirements to increase the number of employees eligible for retirement. The authority encourages more voluntary separations and helps the agency complete the needed organizational change with minimal disruption to the workforce. By offering these short-term opportunities, an agency can make it possible for employees to receive an immediate annuity years before they would otherwise be eligible, according to OPM.

An agency must request VERA and receive approval from the Office of Personnel Management (OPM) before the agency may offer early retirement to its employees. The approval from OPM will stipulate a period of time during which the option will remain available. Agencies such as the Department of Defense that have been granted agency-specific VERA are not required to seek OPM approval for their use of this option.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.