The Differences Between a Will and a Trust and Which Do You Need
In the world of legal jargon, we often hear terms that are familiar to us. However, their legal meaning eludes us. Two of these terms are “Will” and “Trust.” Knowing and using these legal documents appropriately can help build a total estate plan to protect your loved ones.
What is a Will
A Will lays out the distribution of your assets and indicates which heirs will inherit what assets. It can also direct care for dependent children. You select an executor, who will manage your affairs after you die along with specifics on desired funeral arrangements. You may change your will at any time and death activates the will. Laws differ between states, requiring state specific wills, based on your legal residence. Each adult needs their own will to cover assets in their name or legal interest in assets jointly held. Wills are less expensive and less complicated than a trust and will save money for simple estates. The downside is that they are expensive to probate and can take a year or longer to settle.
What is a Trust
A Trust is a document that takes effect as soon as you create it. A trust serves as a business entity and gives you more control over asset distribution. For example, you can instruct a trustee to maintain an account for minor children directing when and how much they receive. A will would grant the heir all the money at once, regardless of the child’s age. A trust allows for asset distribution to begin before, at or sometime after your death.
The Trust entity include a trustee, who holds title to the assets and manages the account. Prior to your death, you can be the trustee for your trust, giving you full control of all assets until your death. After establishing the trust, it is necessary to retitle assets into the trust. One significant benefit of a trust is it bypasses probate, allowing heirs to obtain their inheritance faster and saving the estate money. Trusts are also private records, unlike wills which become public documents. Having a trust does not eliminate the need for a will, which covers all assets not listed in the trust.
Do You Need a Will or a Trust
With the raising of federal estate taxes to over 5 million dollars per person, most estates are less concerned with taxation. However, those with significant assets, businesses, real estate holdings, minor children or dependent adult children, can all benefit from a trust.
Simple estates divided evenly among all children can pass the majority of their assets through beneficiaries, leaving only a small percentage to the will and the probate process. The use of asset titles can impact asset distribution, as a strategy to pass more assets to heirs without the use of probated wills.
Wills cost the least upfront but cost more upon death and take the longest to complete. Trusts are more expensive upfront but add an element of privacy, are more tax efficient, and can deal with complicated income streams or special needs of dependent children. Whichever route you choose, take the time to complete a will or trust ensuring your assets go to your loved ones and not court costs and fees.