What’s the difference between a will and a trust?

Looking toward the future? Whether you’re thinking about your children’s education or your organization’s financial health, you’re probably wondering how you can make a difference even after you’re gone. That’s why so many turn to financial tools like wills and trusts.

But what’s the difference between a will and a trust?

In short, a living will is designed to create a plan for minor dependents and divide your trust assets amongst beneficiaries after your death. In contrast, a living trust can distribute your assets to beneficiaries at any time.

We’re here to answer that question through an in-depth look at each public document’s purpose and specific estate planning benefits so that you can decide which is best for planning your estate. Read on to find out all you need to know.

What is a will?

A living will is a legal document that takes effect after your death. This piece of paper is ultimately concerned with what will happen to your financial assets and material possession after you pass.

When drafting a will, you’ll designate an executor or personal representative to carry out your wishes. This person could be a trusted friend, spouse, adult child, or your personal legal counsel. Consult with your chosen executor to ensure they’re prepared to preside over your will.

Common aspects of a will include:

• Beneficiaries – Who will you be leaving your estate to? Your beneficiaries should be listed within your will, and any specifics regarding who is entitled to what should be made abundantly clear.

• Major assets – Houses, cars, companies, and investments may all be considered major assets of your estate. Anything worth a significant sum of money should be listed out and designated to a specific minor beneficiary.

• Debts – Any loans, credit cards, mortgages, or unpaid taxes may be subject to repayment by your estate. This could be something your executors take care of before your remaining assets are divided up. In addition, many people use life insurance as a way to pay for longstanding debts after their death.

• Appointed guardians – If you have minor children, a will is imperative to determine who will take care of them in the event of your passing. You may also choose to allow a portion of your assets to be distributed to your chosen guardians to help take care of the children and pay for various living expenses.

A will is a common and very necessary legal arrangement document for most people. It’s a useful tool to assure that your estate can be easily transferred and may help avoid complex legal situations and disputes over who is entitled to what.

To comply with all state and federal requirements, you will most likely require a legal or financial advisor to assist in the drafting of your will. Be sure to contact an expert to assure your will is legal and binding.

What is a trust?

While a will is useful for nearly everyone, a trust document is a slightly more specified legal document.

Put simply, there are a lot of benefits to having trust. A trust document is a legal entity formed by a grantor to distribute its assets to beneficiaries. The trust is maintained by an appointed third party known as the trustee. This trustee is responsible for maintaining the irrevocable living trust.

The defining aspects of trusts include:

• Establishment before death – A trust agreement goes into effect the moment it is created. There’s no need to wait until the death of the grantor.

• A long-lasting estate – Trusts are most often formed by estates with larger financial assets. Their goal is to provide for an extended period of time. Estates may pay beneficiaries interest on the principal investments, effectively creating a permanent source of income.

• Complex payouts – While a will simply distributes the assets of the deceased’s estate, trusts may have more complex payouts. You may be wondering, is a trust taxable? For example, a trust agreement may be established to provide a specific monthly allowance or to pay for tuition and living costs for a child’s college.

Choosing the estate plan that fits your needs

To decide between creating a will and establishing a legal arrangement trust, it’s helpful to analyze your own personal needs.

A will is useful in the following scenarios:

• You are a parent – Wondering how to open a trust fund for a child?  Trusts do not allow you to appoint guardians to your children. All parents should have a will to ensure their children are taken care of in the event of an untimely tragedy.

• Simplifying your asset distribution – For those looking to distribute their assets to their heirs in a simple and timely fashion, a will is often the best way to go. It costs very little to draft a will, and this can be done with relative speed.

As previously mentioned, a will can benefit most people who are looking to pass on their trust assets after they’re gone.

On the other hand, an irrevocable living trust may work best for those with the following needs:

• A larger estate – A trust may be necessary for high net-worth individuals. If you wish to create an entity to provide for the long-term or are interested in continued contributions to charitable causes, you will need a trust.

• Probate avoidance – Trusts avoid probate court—the judicial body that investigates wills, estates, and conservatorships. Probate can be a long and costly proceeding, so avoiding it can help make the most estate’s assets.

• Privacy – Trust remains private even after the death of the grantor. All aspects of the trust remain between the trustee and the beneficiaries.

Importantly, the proceeds of both wills and revocable trusts may be subject to estate tax, capital gains tax, and other requisite taxes. Consider consulting with a financial expert to get the full picture of your IRS requirements.

To avoid having to set up a trust in person, simply fill out this form to apply for trust online right now.

Sources:

• Trust and Will. Will vs Trust – What’s The Difference & Which Option is Right for You?. https://trustandwill.com/learn/difference-between-trust-and-will
• Money Wisdom. Estate Planning 101: The Difference Between A Will And A Trust. https://go.hfcu.org/blog/estate-planning-101-the-difference-between-a-will-and-a-trust
  AARP. 10 Things You Should Know About Writing a Will. https://www.aarp.org/money/estate-planning/info-09-2010/ten_things_you_should_know_about_writing_a_will.html