While it’s likely that most people have heard of the terms will and trust, many don’t know how one differs from the other. Both are legally-binding arrangements designed to help you successfully manage the distribution of assets in your estate to your beneficiaries, however, they also have very distinct differences.
Will vs. Trust: How is One Different from the Other?
What is a Trust
A trust is a legal entity that is created to manage and hold your estate during your lifetime. It also exists to help dictate how the assets you leave behind will be distributed after your death.
You have the option to manage the trust yourself or assign the management to an entity or individual. The entity or individual that manages your trust on your behalf is called a trustee.
Different types of Trusts
There are two prevalent types of trusts: testamentary and living trusts.
A testamentary trust is a legal entity that is established together with your will. Both will become effective upon your death.
On the other hand, a living trust is an entity that is created and managed while you are still alive. When establishing a living trust, you need to pick between a revocable and irrevocable trust.
Benefits of a Living Trust
There are two benefits of establishing a trust to manage your estate:
- With a living trust, you are not required to go through a probate process. Simply put, probate is an asset distribution and authenticate process that’s conducted by the court. Avoiding probate can save your loved ones time and money.
- Since living trusts are not public information, your assets are distributed in private.
What is a Will
More commonly referred to as last will and testament, a will is a legal document specifying how your estate and affairs will be handled after you die. Typically, a will allows you to:
- Appoint an executor to warrant your affairs are settled per the terms stated in your will
- Plan and fund your funeral
- Delineate relevant information like asset location and bank account details
- Allocate your properties and assets to beneficiaries
- Assign a guardian for your dependents (elders and children)
For a will to be effective, it needs to be authenticated by a court-supervised process known as probate hearing. You can amend or revoke your will at any time after it has been executed, given you are mentally competent.
Will vs. Trust: What are the key differences?
Now that you have an idea of each estate planning option’s basics, it’s time you discover the distinct differences between the two:
Assembling a trust can be expensive and time-consuming as they have to be managed over the lifetime of the trust. On the other hand, wills are easy to create and won’t require any ongoing management. They just become effective after your death.
As soon as filed with the courts for a probate hearing, your will becomes a public record. This is not the case with trusts, which remain private. Depending on the situation, you might prefer that personal matters are settled behind closed doors. In similar cases, a trust is a much better option for you.
While the set-up fees associated with wills make it appealing, a trust gives beneficiaries the luxury to skip the probate process. Skipping the probate process can mean significant savings for the beneficiaries in terms of time and money.
The cost of establishing an attorney-drafted trust can vary depending on the estate. Typically, the average cost can range from $1,000 – $1,500. On the other hand, the average fee for drafting a will is only around $300.
It is important to remember that one cannot replace the other. A will directs the distribution of almost everything in your estate, including guardianship of dependents. A trust focuses primarily on the distribution of specific assets like life insurance or a piece of property.
Will vs. Trust: Which one is best for you?
Since the two are not mutually exclusive, you can use both in your estate plan. However, if you prefer to use only one, it will come down to your state’s probate laws and your estate plan goals.
Generally, trusts are ideal if you have large complex estates and considerable assets and wealth to distribute. If you are also particular about the amount of gift taxes or estate that will be taken from your beneficiaries’ inheritance, a trust is your best option.
Wills can be a great option if you have a simple estate and your primary goal is to ensure your high-value assets and properties are distributed to your loved ones. If you are not particular about the probate taxes, a will should be enough.
It is reassuring to know that even if you are no longer around, you still get to decide what happens to your estate. Now that you know the difference between wills and trusts, you can decide which one can best protect your estate and the rights of the loved ones you’ll leave behind.
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