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While estate planning is an excellent way to prepare for the future, there are several core decisions you need to make. For example, you need to decide what estate planning options are most suitable for you, offer the best benefits, or present fewer hassles for your loved ones. Such decisions ultimately affect how things play out later when you’re no longer around, so you want to make the best decisions now.
And one of such estate planning considerations is in the area of wills and trusts. They both have their similarities, differences, advantages, and disadvantages, and identifying these things will help you determine which estate planning tool is right for you.
Wills
A will, formally called a Last Will and Testament basically expresses your wishes concerning the disbursement of your estate after you pass away. On the document, you spell out who receives what, and you can even disinherit a default heir who was legally supposed to receive a share under your state’s laws.
You can also include instructions regarding how you want your funeral held.
Furthermore, you may decide to call an estate planning attorney to help you in drafting your will. You can also search “probate lawyer near me” via google and schedule a free consultation online. But if your estate is a simple one, you can avoid attorney fees by downloading and printing out blank wills online. In such a will, you will find instructions on what to write so that all you have to do is fill in the blanks.
A will typically goes into effect after death. So you can alter your will during your lifetime by either making a new one or a codicil (a will that replaces an older one without having to destroy the latter).
Notably, your will must go through probate court when you die. This is one significant difference between a will and trust. Your will becomes part of public records, and any asset passed by a will must go through the court. People who wouldn’t want this form of publicity may decide to transfer their wealth via a living trust instead.
There are multiple things that can go wrong if you are not careful with the paperwork regarding your will. At the end of the day, no one wants their children to be squabbling over the assets of their parents. This is why you cannot just go ahead with any or every lawyer you come across to make your will. To choose the best lawyers that specialize in creating wills, read more.
Guardianship
When you transfer assets by a will, note that your children below 18 cannot inherit such properties until they come of age. But you can use a will to appoint a guardian for them. A will also allows you to spell out how you’d like the guardian to handle such assets.
Trusts
A trust is a legal agreement between the trust creator (grantor) and a trustee to manage assets on behalf of a beneficiary or beneficiaries. It is another method of asset transfer, and it’s often preferred because it avoids the publicity of probate. Additionally, a trust goes into effect immediately after it is executed rather than waiting till you pass away. This is another difference between wills and trusts. However, you must fund an asset into a trust for it to be held therein. Any asset you leave out may have to go through probate.
There are basically two types of trust
· Irrevocable trust
· Revocable living trust
Irrevocable Trust
An irrevocable trust is one that cannot be altered or terminated once created. This means once you fund an asset into the trust, it becomes the permanent property of the trust. You’re no longer the owner. Therefore, the probate court, tax, and your creditors can no longer touch such assets when you die. The total value will pass to your named beneficiaries tax-free.
But the downside to an irrevocable trust is that you can no longer use the trust assets for your benefit since they’ve left your ownership.
Revocable Living Trust
On the other hand, a revocable trust can be altered or terminated at any time during the grantor’s lifetime. The grantor can decide to take out an asset from the trust ownership whenever he wishes. As a result, such assets are not regarded as the permanent property of the trust. They are therefore still liable to tax, lawsuits, and creditors. Notwithstanding, the assets will not pass through probate.
As the grantor of your trust, you can name yourself as the trustee and use the assets for your benefit until death. But you must appoint a successor trustee to manage and transfer such possessions when you pass away.
Trusts are a more complex asset transfer tool than wills, and you may require the assistance of an estate planning attorney to execute one.
So what are the key similarities and differences between wills and trusts?
Similarities between Wills and Trusts
1. Wills and trusts are both asset transfer documents
2. For an asset to be passed by a will or trust, you must address it in the document.
3. Both documents allow you to give directives on how the assets should be handled, transferred, and used.
4. A will can be altered or annulled just like a revocable living trust. However, it’s not so with irrevocable trusts.
Differences between Wills and Trusts
1. Whereas all wills must be probated, it is not so with trusts. Probate can be quite expensive, complicated, and lengthy, especially for complex estates. High net worth individuals would likely prefer using trusts or their asset transfer. This would help keep the estate out of the public eye while minimizing hassles for the survivors.
2. Wills can be challenged in court, but rarely does this ever happen with trusts.
3. A trust goes into effect as soon as the grantor funds it with assets. Conversely, wills stay dormant until the grantor’s death.
4. Whereas wills revolve around inheritance, trusts have other uses. For example, a living trust can serve for incapacity planning since the successor trustee can manage assets on behalf of the grantor when they become incapacitated.
5. Wills can be used to appoint guardianship for minors. Trusts do not have this capacity.
6. While trusts are private legal entities, wills go into public records.
7. Trusts are more expensive to create and most often require expert assistance.
Wills vs. Trust: Which Should I Use for My Asset Transfer?
Knowing what instrument to use will depend on your estate planning goals.
If you wish to keep your estate and family out of court, then a revocable living trust would be perfect. You would be enabling your loved ones to inherit quickly and hitch-free. But if your estate is a basic one with a standard family structure, a will tends to be more cost-effective when you consider the cost of hiring an attorney and retitling each asset.
If your estate is very large and you wish to avoid estate tax, you may consider using an irrevocable trust. It can also shield your assets from your creditors and lawsuits, enabling your loved ones to inherit all you’ve left for them.
However, it’s good you know that wills and trusts are not mutually exclusive. You can use a will alongside a trust. By doing so, you would limit the value of property going through probate, thus simplifying the process for your survivors.
You may also like: How Much Money Will You Need for Retirement?
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