How Is a Trust Different from a Will?
Although many people use the terms “will” and “trust” synonymously, these are entirely separate legal documents providing distinct levels of protection for your estate. Both supply a means for you to determine the allocation and management of your assets following your death, but they each serve different purposes and require distinct legal processes. A will is a legal document that details your intentions for asset and property distribution after your death. Wills name your beneficiaries, create an inventory of your possessions, assign assets to beneficiaries, name an executor to oversee this distribution, and supply instructions for completing this process.
A will must adhere to state guidelines in terms of its creation, signing, and witnessing to be considered legally valid. It will only take effect after you pass away, but first requires review by the court before the distribution of assets begins. Probate, or the court-supervised process of verifying your will, involves locating and appraising your assets, paying off claims by creditors, paying taxes from the estate, managing other financial obligations, and transferring the remaining assets to the designated beneficiaries.
The probate process tends to be complex, confusing, and expensive, sometimes taking several years to settle, during which time access to your assets is prohibited. During this process, a judge will make the final decisions for the management and allocation of your assets, meaning you lose a significant amount of control over your legacy. It also results in loss of privacy because probate documents are part of the public record, including the list of beneficiaries and any conditions you have stipulated they meet in order to receive the assets. For these reasons, most people prefer to create a trust, which avoids the probate process altogether, saving your loved ones’ time, stress, and unnecessary expenses.
A trust is a legal arrangement that involves appointing an individual or a trust company to hold the assets and property within your estate on your behalf or on behalf of your beneficiaries. As the trust’s creator, you are the “trustor” and may begin transferring assets into the trust right away, which effectively transfers ownership of the assets from yourself to the trust. The person you appoint to manage the trust is known as a “trustee,” and they are responsible for controlling all the assets and property within the trust. You also have the option of naming yourself as the trustee, but this requires you to designate a “successor trustee” to take over following your death to distribute your estate in accordance with the terms listed in the trust.
What Are Revocable Living Trusts?
Also known as living trusts, revocable trusts give you the legal authority to change, amend, revoke, or terminate the trust at your own discretion while you are still alive without involvement by the court. Revocable trusts are the most common form of trust featured in estate plans, as they allow you to make important updates based on changing financial circumstances and relationships, such as adopting a child or obtaining a divorce. A revocable trust is also incredibly useful if you become disabled, comatose, or otherwise incapacitated and can no longer make the necessary financial decisions concerning your estate.
For debt collection and estate tax purposes, the assets you place within a revocable trust are still legally your personal assets, meaning this type of trust offers no protection from legal judgments rendered by the court regarding creditor claims. Revocable trusts become irrevocable after your death, and all assets contained in the trust at this time become subject to state and federal taxes. You may design the trust so it incorporates separate irrevocable trusts for surviving spouses, children, or other beneficiaries. Unlike a will, a living trust does not become part of public record, allowing you to protect your privacy and make it more challenging for creditors to pursue debt collection against your estate.
What Are Irrevocable Trusts?
Irrevocable trusts cannot be amended, revoked, or terminated after creation, barring extreme extenuating circumstances. Transferring your assets or property into this type of trust amounts to legally surrendering ownership and control of these assets. You appoint a trustee to manage them and no longer have access or the ability to reclaim them during your lifetime. According to the law, any assets within an irrevocable trust are no longer part of your estate, making them immune to creditors or any debt collection efforts pursued against your estate.
In contrast with a revocable trust, in which you retain asset ownership, an irrevocable trust is a completely separable entity from your estate and not eligible for state or federal taxes. Any claims made by creditors against your estate cannot affect the assets within the trust or any beneficiaries you have named to receive them. Irrevocable trusts are most useful when managing large estates with significant asset holdings, as protection from taxes allows your beneficiaries and surviving family members to retain the full value of the assets.
How Does Trust Administration Work?
Regardless of whether you choose a revocable or irrevocable trust, the trust administration process will begin as soon as you pass away. Trust administration is the process the trustee undergoes to fulfill legal responsibilities for maintaining, preserving, and distributing the assets within the trust. You can choose to order your trustee to follow your instructions exactly as described in the trust or allow them a degree of freedom when making decisions regarding investments or allocation of your estate.