Wills Versus Trusts
While the terms “will” and “trust” are sometimes used interchangeably, they are not the same kind of legal document and do not offer the same protections. They both allow you to determine how your assets will be distributed to your beneficiaries after your death, but they are different documents that serve distinct purposes. A will is a legal document that explains your intentions for how your assets and property should be distributed after your death. It creates an inventory of your possessions, names the individuals you wish to inherit them, identifies an executor responsible for distributing your assets, and supplies instructions for doing so.
Anyone crafting a will must follow specific state guidelines for writing, signing, and witnessing the document. Wills take effect following your death and a court must verify any will as legally valid by the court before allocating your assets. Following your death, a will goes to probate court, which is the court-supervised process of authenticating the will, locating and appraising your assets, settling outstanding creditor claims or paying taxes, and transferring the remaining assets to beneficiaries.
Wills remain an important estate planning document, especially for those with minor children. A will can ensure you appoint guardianship of your minor children to the appropriate individuals after your death. In addition, you can utilize a will to alert beneficiaries of previously unknown assets and ensure the distribution of your possessions to friends, family, or other individuals. Your will can also disinherit individuals who normally would have inherited your properties or other assets. Should you pass away without a will in place, a situation known as intestacy, each of the above topics is subject to the decisions of the court—including the guardianship of your minor children. Thus, it is still essential for individuals considering creating a trust to ensure a will is in place.
Benefits of Trusts
The probate process is complicated, expensive, time-consuming, and results in loss of control as a judge retains responsibility for managing and allocating your assets. It also causes a loss of privacy because all probate documents are subject to public disclosure, including the names of beneficiaries and any conditions you may place on the transfer of the assets. For these reasons, many people choose to create a trust, which does not require undergoing probate to administer your assets. Trusts can save your family members time, hassle, and avoidable expenses.
A trust is a legal arrangement in which you appoint an individual or a qualified trust company to hold your assets and property either on your own behalf or on behalf of your named beneficiaries. You must be legally mentally fit to create a trust and initiate a fiduciary relationship with the administrator of the estate. As the creator of the trust, you are the “trustor” and can divert assets into your trust immediately after creation, effectively transferring ownership of these assets from yourself to the trust.
An essential element of creating a trust is appointing a third party as a “trustee,” the person that controls the assets within the trust and manages the property listed within the trust. Alternatively, you can choose to name yourself as trustee. If you decide to make yourself the trustee, you must also name a “successor trustee,” who will take control of the trust after your death and distribute assets to beneficiaries according to the terms outlined in the trust. You may also name a successor trustee if the original trustee you designate is unable or unwilling to fulfill their duties.
Revocable Living Trusts
Revocable trusts, also referred to as living trusts, are the most common form of trust included in an estate plan. They give you the authority to amend, change, revoke, or completely terminate the trust within your lifetime without court involvement. This is extremely useful considering financial circumstances and relationships often change over time, and your trust must reflect your updated situation. A revocable trust can also allow you to stipulate specific instructions should you become disabled, comatose, or otherwise incapacitated and unable to make sound decisions regarding your finances.
Because the assets within a revocable trust are still considered your personal assets for the purposes of creditors and estate taxes, this type of trust does not offer protection from court-ordered legal judgments. In most cases, a revocable trust becomes an irrevocable trust after your death. All assets within the trust at the time of your death will be subject to state and federal taxes. You can design the trust to divide into separate irrevocable trusts for the benefit of your surviving spouse, children, or other beneficiaries. In contrast with a will that makes your wishes available for review by the public, a living trust is not made part of the public record, protecting your privacy and making it more difficult for creditors to collect debts from the estate.
Irrevocable trusts cannot be amended, changed, or revoked after they are created, except in extremely extenuating circumstances. After you transfer your assets into an irrevocable trust, you are legally surrendering ownership and control of these assets to an appointed trustee and can no longer take possession of them during your lifetime. Because you no longer have direct access to these assets after transferral into the trust, they are not considered part of your estate and are therefore protected from claims made by creditors or debt collection efforts carried out against your estate.
Unlike a revocable trust where you retain ownership of the assets, an irrevocable trust exists as a separable entity, meaning you are not legally required to pay state or federal taxes on these assets. Any claims against your estate cannot include assets in this trust or those of any named beneficiaries. Irrevocable trusts are suitable to manage larger estates with greater asset holdings to reduce or completely avoid paying estate taxes. These benefits offer security for surviving spouses, family members, and beneficiaries of the estate.