You’ve likely heard it before. Regardless of health, wealth, marital status, or parenthood, everyone should think about estate planning.
Most people beginning the process of estate planning – and those who have already created their estate plan - know that wills and trusts are both important documents. But you may not know the difference between the two and which is right for you.
What is an Estate Plan?
Before diving in too far, it’s critical to define what an estate plan is. Your estate consists of everything you’ve accumulated throughout your lifetime - real estate, vehicles, checking accounts, insurance policies, investments, and personal belongings.
An estate plan provides instructions for what to do with every piece of your estate upon your death -- including who will become your children’s guardian. One of the primary goals of your estate plan is to ensure that your wishes regarding your asset distribution at death are met and are administered as efficiently as possible. If you do nothing, your estate may require probate and the laws in your state will determine what happens to your assets, which can be an arduous and painful process for those left behind. To avoid that, you should consider working with estate planning professionals to create and implement certain estate planning documents.
That’s where your will and or trust come in.
What Is a Will and Trust?
As noted, estate planning documents, like a will or trust, help you prepare for what happens to your assets at your death. They’re both valuable tools, but there are key differences between the two. For example, a will distributes property owned in your name as you wish after you die. It names an executor who will work with your estate planning professionals to manage and settle your estate, as well as outlines who will become your children’s guardian if applicable. It also specifies to whom your assets will be distributed and can include additional terms for the asset distributions.
Wills need to be administered in court, with your executor generally working with an attorney to handle the process. This is known as probate, which can generally be avoided by setting up a revocable trust and ensuring that all your assets are either titled in the trust name or have valid beneficiary designations.
A trust is a legal contract between the grantor and the trustee. While creating the trust, you (as grantor) can name the trustees to serve both immediately and in the event one or more of your original trustees are unable to serve. The trustees can be either individuals or financial institutions. These trustees will be the ones to manage and distribute your assets to your beneficiary or beneficiaries under set terms. Often, these terms can be ongoing, unlike a will that establishes who receives what after your death.
There are two common types of trusts: a revocable trust which allows you to access your assets and adjust the terms at any time you’re alive and competent. Generally, you will serve as the initial trustee which simplifies administration of the trust. An irrevocable trust is a trust that generally cannot be modified after it is established. For irrevocable trusts you create during life, there can be income, estate and gift tax consequences associated with whom you name as trustee, so it is advisable to work with your estate planning team when selecting initial and successor trustees.
Wills vs. Trusts
- Effective after your death to determine administration and distribution of assets titled in your name
- No protection during incapacity
- Does not avoid probate; can create costly and time-consuming delays and could reveal personal details in court
- Names guardians to care for minor children
- When used in conjunction with a revocable trust, provides that assets titled in your name (i.e., not funding the trust) are “poured over” to your trust
- Can offer guidance and information on your funeral proceedings
- Effective once signed as to assets that are owned by the trust
- Can provide for increased ability to manage and administer assets during incapacity
- Avoids probate, creating an efficient administration and protecting privacy
- Trust is only effective if property is titled in the name of the trust
- Does not provide guardianships for minor children
- Makes administering real property located in a different state much more efficient by reducing or eliminating the need for an out-of-state probate proceeding
Why Wills and Trusts are Important
Wills and trusts are some of the most important legal documents a person will ever have. Both can help ensure that everything you worked hard to achieve while alive is managed and distributed after you die. Additionally, they help your family members, executors, and trustees dealing with your death feel less stressed because they have explicit instructions as to your wishes they can refer to time and time again.
Whether or not you opt for a trust or a will, or both, will depend on your goals. If you want to avoid probate, a trust may be your best option. If you have only assets with co-owners or assets that can pass by beneficiary designations or other contract, you may only need a will. Ultimately, what you choose should be guided by your circumstances - but seeking guidance from a financial advisor or another professional with experience in estate planning will ensure that your plan meets your needs and goals. Because no matter what, you should consider drawing up an estate plan!
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