Wills and trusts are estate-planning musts. A will becomes effective upon death of the testator, but a trust may be used to distribute property sooner.
Wills and trusts are estate planning tools that govern the distribution of your estate, among other things, but they both serve separate purposes. They can also be used together to create the cornerstone of a smart and effective estate plan. The main difference between the two is that a will, sometimes referred to as a last will and testament, goes into effect only after you pass away. Inversely, a trust can go into effect and be deployed to distribute your assets prior to your death, when you die, or even at a date in the future after you are deceased. There are distinct advantages and drawbacks to both types of instruments.
Wills vs. Trusts
Wills are used to distribute and allocate property that is your name when you pass away. If you have property held with another person (such as an unmarried partner) or in a trust, a will does cover its distribution. Property that will be included in a trust must be placed in the trust’s name.
In the Courts
Moreover, in most instances, a will must pass through probate court, which oversees the distribution of assets and ensures that the executor of the estate handles all claims and debts the estate owes, such as final tax bills and payments to creditors. By contrast, a trust does not go through probate, which is one reason that many families prefer trusts for certain properties or even entire estates. Bypassing probate can mean saving money and time.
As Public Records
Wills, once probated, become part of the public record. Anyone with a question about who got what and who owns what following the decedent’s passing can access a probated will.
Trusts, on the other hand, do not become part of the public record and can help families retain privacy regarding assets. Trusts are considered private contracts between the maker of the trust and the trustee, and there are very limited reasons why beneficiaries will ever need to go to court regarding issues with trusts, so total privacy is preserved.
Wills can accomplish some objectives that trusts cannot. For instance, the testator may name a guardian for any minor children or disabled children in their care via a will. The testator may also use the will to dictate wishes regarding funeral arrangements. Trusts cannot be used for these purposes.
When a testator fears that the inheritance they wish to bequeath to their heirs may be snapped up by creditors during a bankruptcy or lawsuit, through a collection agency or even during a divorce, a trust can provide creditor protection. Assets remain in the name of the trust, and the beneficiary can access those assets according to the testator’s wishes. The beneficiary may even be named the trustee, giving them the ability to manage their own inheritance if desired. Wills do not afford that type of safeguard.
A will does not provide the protection for government benefits for beneficiaries with disabilities that is achieved with a trust. For example, if you have a disabled child who received needs-based government benefits, then the child may lose those benefits if they receive an inheritance from you. If you place the funds, property or other assets in a trust, however, it preserves those benefits in most cases and ensures that your child has the money needed for care in the future.
The establishment of a trust may also reduce or eliminate the tax that your heirs must pay upon your death. Although state death tax rates vary, your estate, if left to probate, will owe both federal and state taxes when you die and have a substantial amount of money or property to leave behind. If you opt for a trust instead, you can see significant reduction in estate taxes.
Who Administers a Trust?
A trust is administered by a trustee Define: Trustee A person (or even an entity, such as a law practice or a bank) that agrees beforehand in a legal arrangement to hold the title properties and assets for the trust’s beneficiaries . The trust may have just one beneficiary or many, and it may last for the life of the beneficiary or some other predetermined amount of time. It may also stay in effect until another beneficiary or even another set of beneficiaries, dies.
Living vs. Testamentary Trusts
While there are more complicated structures for trusts, the basic two are living trusts, sometimes called inter-vivos trusts, and testamentary trusts. Living trusts are set up during your lifetime; testamentary trusts are established with the creation of a will (or testament) and they go into effect with the will after you die.
Revocable vs. Irrevocable Trusts
Trusts are classified as revocable or irrevocable. When you choose a revocable trust, it allows you to maintain control of assets in the trust, and you can change the terms of the trust or revoke it altogether whenever you wish. Irrevocable trusts, as the name suggests, cannot be changed unless the trust’s beneficiaries agree to the changes. Your assets, once placed in an irrevocable trust, no longer belong to you.
Aren’t Trusts Just for the Wealthy?
While many wealthy people take advantage of the benefits of a trust, even people with modest wealth may stand to reap their rewards. For example, a young family with children may have an IRA or life insurance policy that is their largest asset. Should both parents die, the funds from the IRA or life insurance policy will likely be unattainable by the children until they reach age 18. A trust allows the children in this scenario to benefit from the trust’s money immediately through a trustee and receive the proceeds of the trust in full when they reach a predetermined age, such as 21.
Trusts and wills both have their role to play in effective estate planning. Discuss your particular goals with an estate planner or attorney to determine whether a trust or will (or a trust and will) makes the most sense for your situation and your family’s circumstances.