Wills and trusts are essential to a complete estate plan; depending on your situation, you may need one or both. The size of your estate and potential tax implications are some of the considerations that will help determine what works best for you. Understanding these important parts of an estate plan and how each function can also help guide your planning.
Ultimately, it’s always best to enlist the help of a qualified estate planning attorney. Here is a guide on everything you need to know about wills and trusts.
What Is a Will?
A will, officially called a last will and testament, is a legal document that identifies an individual’s wishes for how their assets should be distributed after their death. To be official, a will must be signed and witnessed according to the state laws.
A will establishes the following:
- The parties who will take possession of your investments, assets, and heirlooms.
- The parties who will care for and distribute real estate.
- How to resolve debts or liabilities.
- Instructions for the short-term and long-term, including funeral arrangements.
Part of a will requires appointing an executor to oversee the asset distribution process and settle debts. The executor will file the will in probate court. Under court supervision, the assets will be distributed, and liabilities will be settled. This document is available for public viewing.
Benefits of a Will
Executing a will during your lifetime offers benefits to the heirs of your estate. The following are some reasons why making a will is worthwhile.
- Designate heirs. A will allows you to choose who is entitled to your property.
- Choose an executor. A will allows you to choose whom you want to distribute the assets of your estate.
- Appoint guardians. Having a will lets you choose a guardian for minor children.
- Amend or revoke. You can easily change the contents of a will at any time.
- Personal instructions. In your will, you can provide instructions for funeral and burial arrangements. You can also leave instructions on handling other personal matters as well.
- Peace of Mind. A will allows you the peace of mind of knowing your loved ones will receive what you designated them to receive.
What Is a Trust?
A trust is a legal arrangement in which the owner (the grantor) transfers assets via a trustee to beneficiaries. The terms of the trust address the included assets, the appointed trustee, and the number of beneficiaries. The trustee is responsible for distributing these assets, keeping in mind the best interest of the beneficiaries.
A trust can be revocable (terms typically change) or irrevocable (terms cannot change). Unlike a will, a trust can take effect once the assets are transferred to the trust. Therefore, it can occur during the owner’s (or grantor’s) lifetime. Several types of trusts can be set up for a variety of protections.
Advantages of a Trust
Putting an estate in a trust offers some key benefits:
- Trusts avoid probate. A trust avoids the probate process.
- Privacy. A trust is confidential, and the public isn’t informed about specifics.
- Questioning a trust is less likely. Since the trust is private, challenges to the terms are unlikely.
- Potential creditor protection. Irrevocable trust assets are protected, and therefore creditors cannot have access to these assets.
- Some trusts have tax benefits. Irrevocable trusts have some tax advantages.
- Incapacity can trigger a trust to take effect. A trust can take immediate effect if you cannot take care of matters in your estate for some reason.
Which One Works Best — Will and/or Trust?
Whether a will or trust works best depends on your estate. A will can be challenged, but a trust doesn’t include all of your assets or have provisions for guardianship. Often people need both a will and a trust to adequately protect their estates. The following factors is everything you need to know about wills and trusts and what works best for your situation.
A Will Is Easier to Set Up
A will is easier to set up than a trust. Setting up a will may make more sense in urgent situations. A trust is more involved since you must transfer the assets into the trust to be valid. A won’t have the same requirement.
Challenges to a Trust are Less Likely
If you think there’s a possibility of your will being contested, a trust may help you avoid it. A trust’s disposition is not public, so raising claims will be difficult. A trust may be beneficial for those with complicated estates and multiple heirs.
If You Have Minor Children, You Need a Will
If you have children under 18, you will need a will to lay out the terms of guardianship. A trust cannot address those concerns. In a will, you can appoint the person you’d like to care for your minor children.
A Larger Estate May Benefit From a Trust
A trust may be a good option if you have a larger estate and carry a high net worth. A trust (if it’s irrevocable) has certain tax benefits and can also give you protection from creditors.
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.