Every adult needs to make necessary arrangements for the inevitable events of life. As early as today, you should plan for what would happen to your estate after you pass away. In fact, providing clear instructions for your legacy is one of the best things you can do for your loved ones when you leave them.
That said, there are numerous estate planning options out there. Choosing the right path can feel daunting and overwhelming. However, two of the most important parts of every estate planning are will and trust. You’ve probably heard these two terms from an estate planning perspective, but do you understand the difference between them? Do you know which is best to protect your family and assets?
In this comprehensive article, we’ll take a closer look at wills and trusts, discuss the main differences between the two, and help you decide which one is best for your needs.
Will: What Is It?
A will is a document that contains instructions on the distribution of your assets after you pass away to your designated beneficiaries and heirs. A will may also include explicit instructions for matters that require decisions after your death, for instance, directions for your funeral and burial or the appointment of guardians for your minor kids.
In general, a will should be signed and witnessed to be legally valid. To implement a will, it should be filed with the probate court in the proper jurisdiction and carried out by your executor. It will be publicly available in the court’s records which oversees its execution and handling of any disputes.
Trust: What Is It?
A trust is a legal arrangement between two parties. One party (trustor) gives the other party (trustee) the right to hold the title to assets or property for the benefit of a third party (beneficiary). The trustee is a fiduciary obliged to handle and manage the trust assets under the terms of the trust document and for the best interest of its beneficiaries.
Most people use a trust to provide legal protection to their assets and ensure that those assets are distributed according to their wishes while saving time, reducing paperwork, and lowering or eliminating estate or inheritance taxes.
Will Vs. Trust: 7 Key Differences
While both will and trusts are estate planning instruments to assist you in handling your affairs after death, there are key differences you need to understand to decide what works best for your situation.
1. Implementation Date
A will doesn’t take effect until after you pass away. However, some types of trust, including a living trust, become active and ready for implementation once it’s created and funded. This means that a trust can offer you protection and help you direct your estate if you become mentally disabled. This is something that any type of will can’t do.
2. Probate Process
Whether you pass away with a will or without a will, also known as intestate death, your will shall go through probate. Probate is the legal procedure of distributing your assets after you die. And a probate court shall handle your will. They oversee the process, ensuring that your executor distributes your assets as per the instructions in your will. In some states, a probate procedure can be a lengthy process involving hefty costs. And if you die intestate, it becomes more time-consuming since there are more processes to go through for the validation of beneficiaries and assets.
Thus, most people opt to have trust in place. Trust doesn’t have to go through probate courts. This means your beneficiaries don’t have to go through the lengthy process and receive your assets much more quickly.
Unlike wills, trust proceedings are private. In all states, probated wills become public records. This means that anyone can check out the details of your will. If you want some privacy in your personal financial information, a trust is a good option.
4. Cost And Complexity
In general, a trust needs more paperwork to establish. This also means that a trust is costlier to prepare upfront than a will. That said, it’s typically cheaper in the long run since it avoids probate down the road, offsetting the cost of setting up in the first place.
To set up a living trust, you need to fund it regularly. This means that various assets included in your trust–accounts from banking to retirement funds, property, and more–should be properly titled in the name of the trust.
Doing so tends to be complicated, especially if you have numerous assets. An estate planning lawyer can help you complete the necessary legal documents, fund your trust, and name the right beneficiaries for each asset.
Take note that there are other challenges when dealing with assets included in a trust. For example, it may be difficult to find a lender to refinance a property held in a trust. Some lenders may require the grantor to remove the property from the trust, while others may only review the trust agreement during the refinancing process.
In contrast, a will is much easier to prepare. In fact, you don’t necessarily need professional help to establish a valid, legal will. Even software programs can assist you in creating a legally binding will. Once you draft a will, you only need it to be witnessed, usually by two mentally-healthy adults who know you well. That said, any person may act as a witness to your will.
Take note that in some states, your will should be notarized to be legal and valid. So, always check the regulations where you live.
Due to the complexity of a trust, it requires regular maintenance. It is most useful when it’s up-to-date with all your assets. This means that every time you acquire a new asset such as a car or home or open a new bank account, you need to transfer those assets to your trust right away. Since you’ll likely continue to invest and acquire new assets throughout life, a trust will require continuous maintenance.
Meanwhile, wills are considered low maintenance. If you have a will, it’s recommended to update it at least 3-5 years, or whenever a significant life event occurs, for instance, having a child or getting re-married.
While both will and trust are legal documents that can help handle and manage your assets, they are created under different laws. Will fall under testamentary law while trust is under contract law. In general, contract law has a stricter standard. This means that trust takes precedence against a will.
In addition, trusts become effective once set up, funded, and updated throughout the trustor’s life, whereas wills are only effective until your death. This means that trust supersedes will due to its effective date and its ongoing nature.
As mentioned previously, wills are low maintenance. Although it’s convenient, it also carries the risk of having an outdated will when you pass away. This means that wills are more likely to be challenged or contested since it’s easier to argue that the will is outdated or was created at a time when you’re under the influence of someone else or not in your sound mind.
Meanwhile, a trust, due to its ongoing nature, makes it more difficult to be challenged successfully. It’s also considered a separate legal entity. Technically speaking, these assets are no longer a trustor’s estate.
Take note that creditors can claim against both trust and wills. However, it’s more difficult to claim against trust than a will. Moreover, if you have set up an irrevocable trust, you can guard your estate against creditor claims.
Which One Should You Choose?
The best estate-planning instrument for you will depend on your preferences and situations. For people with a small and simple estate, a will is more than enough to cover their needs. Meanwhile, there are some cases where having a trust could be beneficial for you–whether you have numerous assets or a complex estate, own a business, or simply want to avoid the cost and delay while keeping things private.
A general rule of thumb is that most people will need a will, but a few will require trust. That said, most people choose to get both a will and a trust to get both their advantages and benefits. If you’re unsure about the right option, consider consulting an estate planning lawyer and a financial and tax advisor. They can help you determine what you need to achieve your estate planning goals.
Wills and trusts are critical legal vehicles to ensure proper management of your estate after you pass away. It ensures that your assets are transferred to your beneficiaries as per your wishes, providing for those close to your heart.
While wills and trusts can be a pillar of estate planning, each has its own key differences to consider. Depending on your situation, you might need only one or the other. However, some people also end up using both to achieve their goals.
If you’re unsure about your case, it’s best to work with a trustworthy lawyer to help guide you through the complexity of estate planning and develop a strategy that works best for you and your family.