Trust vs. Will: Differences to Note in Estate Planning
- Although it may be hard to hear for some people, we all will inevitably die. So a financial plan for when that time comes is crucial.
- Two common ways people set up a financial plan for their loved ones are through wills and trusts.
- The way that trusts and wills distribute assets differ from one another. It’s important to know the difference between both to plan accordingly.
Will and trusts are created in the anticipation of someone’s incapacitation or death. When a person dies, a will and a trust can prevent their children and other loved ones from experiencing extreme financial hardship.
Wills and trusts are a considerable part of creating an estate plan, especially since it’s viewed as protection for one’s assets and finances. Therefore, knowing how the different planning tools can be effectively utilized is essential when making important decisions about your future.
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A trust is created when you (through a written legal document) give property to another person (trustee) to hold for the benefit of a third person (beneficiary). A trust is a legal way to maintain and protect your assets for the future. A trust is effective as soon as it is signed and funded; however, setting up a living trust is complex as you have to transfer assets into it.
There are many different types of trusts, including revocable and living trusts. A revocable trust, sometimes referred to as a revocable living trust, is a type of trust that the creator can revoke; a living trust is a trust created when a person is still alive.
Currently, trusts aren't widely used by everyone, typically because of the stigma that trusts are exclusively for the rich. However, more people are beginning to use them to avoid probate. If you own a home, have children, and want to control your wealth and legacy for generations, then creating a trust will benefit you in the long term.
Recommended Read: Why You Need a Trust to Pass on Generational Wealth
The purpose of a will is to avoid your state's probate (default) rules concerning the property you leave on this earth after you transition. Probate rules are strict yet efficient and apply to the nameless, faceless general population who don't leave behind a will or an estate plan. In probate, the law will make assumptions about what you want to happen to your property after death.
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For example, the law assumes that your children over the age of 18 can handle large sums of money, that you get along with all your family members, and that no one will fight when distributing your assets. Unfortunately, there have been countless instances that show this is not the case. Therefore, it is essential to include in your will who will have ownership of your property once you have passed away to ensure your assets end up in the right hands.
If you don't hire an attorney, you can handwrite your own will, which is called a holographic will. If you choose to handwrite your will, it’s important to get it reviewed by an estate planning attorney. Some states accept a holographic will that anyone else has not witnessed.
If you wish to know the full details of a will’s law, check your state's rules for more information. Whichever option you choose, a will still has age, intent, capacity, and signature requirements.
Three Major Differences Between a Trust and a Will
Now that the major components of both a trust and a will have been covered, below are the three main differences between the two estate plans.
1. A trust becomes active once you sign the document and continues for decades, and a will is activated only after you pass away.
2. Trusts allow you and your family to avoid probate court intervention and the fees that come with the probate process, whereas a will have a long court process.
3. Wills can take longer to transfer assets due to tedious court proceedings. Yet, a trust usually avoids probate, and your beneficiaries may gain access to these assets much faster.
The Money Wrap-Up
It can be difficult to imagine life after you are gone. However, an estate plan is crucial to ensure that your loved ones will be financially taken care of. On the contrary, lack thereof could create difficulties for your family, as they may have to prove in court how they are entitled to your assets.
It can be expensive and time-consuming when a person goes through court to fight for a loved one's assets or money. Therefore, to save your loved ones from going through this hassle, have a plan in place to help those you love most.
Disclaimer: The aforementioned information regarding wills and trusts should NOT be considered financial/legal advice. Should you wish to make any estate planning decisions, always consult a legal professional. CapWay is not responsible for any poor decisions made based on the above information.
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