What's the difference between a Will and Trust?
What's the difference between a Will and a Trust? And which do you need? Is it possible to have both? Hopefully this brief article can give you at least an idea on which suits your situation. Let's dig in.
Both wills and trusts are estate planning tools. They make sure that your assets are protected and handed off to the appropriate heirs. Passing assets on to your spouse is generally not a major issue (there are certain laws that state the passing of wealth to a surviving spouse does not incur estate or gift taxes), so these legal tools are built for transferring estates to children, grandchildren and other heirs.
A lot of this depends on what and how much you plan to leave behind. The transfer process becomes a lot more complex when wealth is passed to a subsequent generation.
A will is a legal written document expressing the wishes of a deceased person. The will has a range of uses, from appointing guardians of minor children to transferring objects and assets to friends, relatives, or charities. A will becomes active only after one's death. A trust is active the day you create it, and a grantor may list the distribution of assets before their death in it, unlike a will. There are irrevocable trusts, often created for tax purposes, which cannot be altered after their creation, and living trusts, which can be changed by the grantor.
After a death, all wills go through a legal process called probate. That term is probably familiar, but you might now know exactly what it means. Probate is where an authorized court administrator examines the will. This process can be lengthy and potentially contentious if family members contest the will. One upside to a trust is that trusts are not required to go through probate when the grantor dies, and they cannot be contested.
What is a Will? The most common type of will is called a testamentary will This legally enforceable document outlines how you want your affairs handled and assets distributed after you die. It can also include a directive for your funeral or memorial. A will is an important component of estate planning, and a number of online will makers offer tools for generating legal forms and documents. If you feel your situation is more complex, it would probably make sense to speak with a professional to make sure you are thinking through things correctly.
A will contains a list of a person's assets and debts. This can include family heirlooms, the contents of safe deposit boxes, property, vehicles, etc. You can leave your possessions to heirs, friends, or charities. A will can be helpful in an estate transfer and other legal proceedings after death, but it's important to be aware of the downsides. Your estate will become part of the public record and anything left by a will must go through probate court. Probate attorneys can be pricey and cannot be avoided in most states There are a few exceptions that are not required to go through the probate process. Retirement accounts and life insurance policies, for example, go straight to the named beneficiaries. If you die without a written will - this is called intestate - what happens to your property, bank accounts, securities, assets, and even the guardianship of your minor children will be determined based on the intestacy laws in your state. It can lead to long court battles and financial hardship for your loved ones. It is pretty simple to avoid, but sometimes we don't want to think about our own mortality.
Appointed Guardians If you have minor-aged children at home, it's important to have a will that specifies who will take care of them if you pass. If a guardian is not appointed at the time of death, your surviving family will have to seek help in court to appoint a guardian. The person appointed may not be one whom you would have wanted to be entrusted with your kids. It would be best to consider how you will pass a portion of your estate to a minor child through a will. A will places your decisions in the hands of the judge presiding over your estate transfer. Your testamentary will carries out your wishes from beyond the grave. A will also allow you to give insight and direction over how your assets are handled and what your heirs will receive. Within reason, you can address how you would like them to use what you have left them. Disinheritance While children (natural or adopted) have a statutory right to inherit, a will allows you to disinherit a child if you choose to do so. A person can only disinherit a spouse or child through a will. A will protects survivors against estate tax liability as well. As of 2021, U.S. estate tax returns are required to be filed if your estate is valued at $11.7 million ($11,580,000 for 2020).3 If your estate is worth less than this figure, there is no tax return required, and you will not be charged an estate tax.
What is a Trust? A trust is a more complex method of estate transfer— you give another party authority to handle your assets for the benefit of a third party, your beneficiaries. A trust can be created for a different reasons, and there are many types of trusts. Overall, however, there are two categories: living and testamentary. A will can be used to create a testamentary trust. You can also create a trust for the primary purpose of avoiding probate court, called a revocable living trust. Living Trust Let's focus on a revocable living trust for estate transfer. Like a will, a trust will require you to transfer property after death to loved ones. It is called a living trust because it is created while the property owner, or trustor, are still living. It is revocable in that it can be changed during the life of the trustor. As long as the trustor is alive, he/she maintains ownership of the property held by the trust. The trust starts operating after the trustor passes away. A living trust allows you to avoid probate court. There are no court or attorney fees after the trust is established. Your property can be passed immediately and directly to your named beneficiaries. Testamentary Trust Trusts tend to be more expensive than wills to create and maintain. A trustee is named in the document to control the assets' distribution according to the trustor's wishes as outlined in the trust. A trust must identify the trustor, the trustee, the successor trustee, and the trust beneficiaries.
Do You Need Both a Trust and a Will? Nearly everyone should have a will, but not everyone most likely needs a living or irrevocable trust. If you have property and assets to place in a trust and have minor children, having both estate-planning vehicles might make sense. Does a Will Override a Living Trust? A will and a living trust are two separate legal documents. One doesn't usually trump another, but if the issue arises, a living trust will most likely override a will.
Things to remember:
Whether you choose a will or a trust, seek professional advice
A trust gives a trustee the right to hold title to property or assets for the benefit of a third party
Trusts offer more control of assets, but they are more expensive and time consuming to set up.
A will spells out how you want your affairs handled and assets distributed after you die.
If you do not have an estate-transfer plan, the state you live in and the federal government will have one for you.
Estates take an average of 570 hours over 16 months to fully settle. Make sure that you have clear plans in place so your family can properly mourn your loss instead of spending time and energy settling your affairs.