If you’ve ever thought about estate planning, you’ve probably come across the terms “trust” and “will,” but what are they, and which is best for you? Many don’t understand the differences between a trust and a will. In this article, we’ll break down the differences between the two so you can make an informed decision regarding what’s best for you and your estate plan.
What is a Trust?
A trust is an estate planning tool used to manage the assets of a person or business and is an arrangement in which one person holds legal title to property for another. In this way, a trust is a legal document that typically involves three parties: they are created by a grantor, who transfers title to their assets to another party—the trustee (the party responsible for managing the trust)—who then manages the assets for the benefit of the beneficiary (the person who stands to benefit from the trust). The terms of a trust must be clearly defined to be valid; this includes specifying how assets should be managed, how distributions should be made, etc.
What Does a Grantor of a Trust Do?
A grantor plays an important role when it comes to trusts. They are responsible for establishing and funding the trust, naming beneficiaries, and deciding how assets will be distributed upon their death. This means they have complete control over who receives money and how much each beneficiary will receive. It also means they can determine when certain assets are released to beneficiaries or when certain conditions must be met before funds can be accessed by beneficiaries.
What is the Role of Trustees?
The trustee is responsible for managing all aspects of the trust, including investing its funds and distributing income and principal when necessary, according to its terms. The trustee must always act in a fiduciary capacity – meaning they must act with care, prudence, integrity, loyalty, and honesty when managing a trust’s funds – and follow all applicable laws regarding trust administration. It is vital for anyone setting up a trust to choose someone trustworthy and capable as a trustee; if you do not select someone with these qualities, you risk losing your assets or having them mismanaged, which could lead to costly legal issues down the road.
What are Beneficiaries of a Trust?
The beneficiaries are those who benefit from a trust – either through receiving income or distributions from it or because they have an interest in its assets which will pass on to them upon death or termination of the trust. Beneficiaries also have certain rights under state law, such as receiving reports about how the trust is being managed and information about its financial status on an annual basis, depending on where it was set up and what type it is.
What are the Benefits of a Trust?
Trusts can be used in many different ways. They can help protect your assets from creditors; provide for loved ones if you become incapacitated; ensure your money will be used as you wish after you pass away; reduce estate tax; and more. In addition, trusts are private documents—unlike wills and other estate-planning documents that become public record after death—so your beneficiaries’ inheritance can remain private if desired.
4 Different Types of Trusts
Various types of trusts serve different purposes. For families, revocable living trusts are commonly used in estate planning. These living trusts allow the grantor to make changes or revoke them at any time during their lifetime; upon death, they become irrevocable and cannot be changed.
In living trusts, there is also something called a successor trustee. A successor trustee is a person or institution who manages a living trust property when the original trustee has died or become incapacitated. The exact responsibilities of a successor trustee will vary depending on the instructions left by the creator of the trust (called the Grantor).
Irrevocable trusts give up control over their assets and cannot be changed once established—not even by their creator. The primary benefit of an irrevocable trust is that it can help protect assets from creditors or lawsuits because it does not belong to its creator after death. They can also provide certain tax benefits that may outweigh this loss of control.
To outline a couple of other nuanced trusts: a spendthrift trust protects beneficiaries from themselves (or creditors) by placing certain restrictions on when funds can be withdrawn from the trust, such as when bequeathing a large sum of money to a child that isn’t mature enough safely inherit the funds.
Charitable trusts make donations as part of an estate plan; these donations are often made in exchange for tax breaks or other incentives from the government or charitable organizations.
Ultimately, trusts can help protect your assets, provide tax savings, and ensure you have control over how your money is managed. Understanding trusts can help investors, and business owners better understand how to protect their wealth for future generations.
What is a Will?
A will is a legal document outlining how an individual’s estate (assets, possessions, etc.) should be handled after death. It is handled by an executor and dictates the beneficiaries of the estate and in what proportions, as well as any other specifics related to the distribution of fortune. Wills are typically prepared by experienced lawyers or legal professionals and are subject to the laws of the state or country in which they were written.
What’s the Role of the Executor of a Will?
The executor’s primary duty is to carry out the deceased’s instructions as specified in their will. This includes distributing assets, paying debts and taxes, and ensuring that all other details in the will are followed through with. It is important to note an executor has no power over any assets until they have been appointed; this means they cannot access accounts, make property decisions or distribute assets until they have received legal authorization from the court.
In addition to these tasks, an executor also has certain legal obligations that must be fulfilled. These include filing the necessary paperwork with local and state governments, filing estate tax returns, notifying creditors and beneficiaries, and submitting formal documents to probate court. In some cases, they may even be required to manage estate funds until they can be appropriately distributed.
Choosing An Executor
When selecting someone to serve as your executor, it’s essential to choose someone you trust implicitly, as this person will be responsible for carrying out your wishes after you are gone. It’s also crucial for them to know financial matters so they can handle any issues that may arise during the process. Additionally, suppose you own multiple properties or have investments across different states or countries. In that case, it’s best to appoint someone familiar with these laws in each location so that nothing falls through the cracks. Finally, if possible, try to appoint more than one person as your executors so that if something happens to one of them (such as illness or death), there will still be someone else willing and able to take over their responsibilities.
What are Beneficiaries of a Will?
Similar to a trust, the beneficiaries of a will are those people or entities that stand to inherit money or property from your estate upon your death. This could be family members, friends, charities, organizations or businesses you support. Your executor should be able to answer any questions about who the beneficiaries are in the will.
The Benefits of a Will
Having a will ensures your wishes regarding the distribution of your estate are clear and legally binding. Without one, it may be difficult for surviving family members or loved ones to access funds or other assets intended for them. Additionally, having a will allows you to name guardians for minor children and provide instructions regarding funeral arrangements and other matters.
It’s important to note having an up-to-date will ensures all assets pass through probate court quickly and efficiently so that there is no delay in distributing the inheritance. What’s more, an up-to-date will helps minimize disputes among family members or other potential heirs because the document is current, and, in case of a change to your family situation, there is no ambiguity about who gets what when someone dies.
Key Differences Between a Will and a Trust
As you can see, there are some similarities between wills and trusts. However, it’s essential to know the differences to determine which would be best for you.
One key difference between a will and a trust is how they’re processed through probate court proceedings. While both documents will need to go through the court system upon death, trusts often require fewer court proceedings than wills due to their ability to transfer ownership of certain assets before death. This can make the process much easier for loved ones when dealing with your estate after passing away.
Another difference is that, unlike trusts, wills do not go into effect until after you die. This also means wills are revocable—unlike irrevocable trusts—which allow you to modify them at any time while you’re still alive. This can be helpful in cases such as divorce, changes with minor children, the birth of grandchildren, etc.
Which is Better, a Will or a Trust?
Whether you should use a will or trust depends on what kind of protection you want for yourself and your family after you’re gone. Wills tend to be simpler and less expensive than trusts, but they don’t offer as much flexibility regarding asset management or estate tax savings. On the other hand, trusts tend to provide more control over how assets are distributed after death—as well as during life—but they require more work upfront to establish them properly.
When Should I Use One or Both?
Generally speaking, if you want to decide where specific items go after you die—such as jewelry or family heirlooms—a will is generally sufficient. If, however, you want greater control over how those items are managed or distributed before or after your death—such as stocks or retirement accounts—then using both a will and a trust together may be beneficial. For example, with both documents in place, you could establish rules regarding how distributions from the trust should be made during your lifetime and then use the will to specify who receives any remaining assets after death.
At the end of the day, anyone over 18 who owns assets should at least consider creating a will – even if they don’t own much or don’t think they need one yet. Creating a will now helps to save time and money later on when these assets must be divided among heirs or beneficiaries. It also ensures their wishes for how things should be handled are followed after their death. Additionally, business owners should always have wills in place if something happens to them. Ultimately, this helps protect not only their families but also their businesses from potential legal issues after their passing.
The Bottom Line
When deciding whether or not you should get a will or trust, consider what level of control over your estate planning you wish to have while still protecting yourself and your loved ones from potential taxes or financial mismanagement after death. Wills are simple documents that specify how assets should be divided upon death while offering some peace of mind through appointing guardianship for any minor children. On the other hand, trusts offer more flexibility in terms of asset distribution but require extra effort upfront for them to function correctly throughout life and beyond passing away. Ultimately, both wills and trusts have their place in estate planning; make sure that yours best serves your needs.
If you’re looking to learn more about living trusts, a living will, or anything else around estate planning needs, consider becoming a Planning Made Simple member. As a member of Planning Made Simple you’ll not only have access to resources that can help to answer your financial questions but likeminded community members who can help to answer your questions about things like wills and living trusts.