If you’re not among the 46% of Americans that have a living will, you likely have wondered when it’s time to create one. You also probably have heard of trusts before and wondered whether this is an alternative to look into.
While trusts are a good idea for some individuals and families, they’re no substitute for a living will. But what exactly is the difference between a will and a trust? Read on to answer this question and to take a look into why you should create each of these safety nets for your loved ones.
What’s the Difference Between a Will and a Trust?
As you likely know, both wills and trusts are accounts that protect your money and assets for your next of kin. They ensure that your funds and property go to your heirs in addition to your spouse (who is already sure to receive property because of the United States Estate and Gift Tax Law’s marital deduction provision).
The main difference between these two documents is the time that they kick into action. A living will don’t become relevant until your death, at which point it details the way you want your assets distributed postmortem. You can leave funds and property to family members and friends while spelling out exactly what you want to go to who.
Trusts, on the other hand, are fiduciary relationships where you give another party permission to manage finances and assets for the sake of an individual third party. This third party, your beneficiary, will receive all assets in the trust fund at a time of your choosing. This often takes place when a beneficiary reaches a certain age (18, 21, 30, etc).
There are also a few other differences between wills and trust funds to keep in mind:
- Trusts can be in the names of minors while wills cannot
- Trusts are generally incontestable in court while wills are
- There can be rules and stipulations surrounding trust fund inheritance while there are none surrounding the allocation of assets in a will
- Wills can always be revised while trusts can only be if they’re revokable
- Will go on the public record while trusts are 100% private
Why Do You Need a Will?
Everyone should have a will to ensure that there’s no fighting over assets after they die. There are very few exceptions to this rule. If you do not have a will, all of your assets will go to your spouse, but others you care about will receive nothing unless your spouse chooses to share.
This can lead other family members the option to contest will documents (or lack thereof). They will end up taking the case to court and likely damage relationships while still not allocating your assets in the way that you want them to.
Note that even well-written wills are required to go through a process called probate. This means that a court will look them over and discuss them with beneficiaries. They will have the chance to contest your will but are less likely to do so (or succeed) if it’s ironclad.
Executing a Will
When writing either a last or living will, you should include:
- A comprehensive list of assets and who they should go to (property, bank accounts, family heirlooms, vehicles, etc)
- A list of debts and who will now be responsible for them
- The contents of all safe deposit boxes and similar storage spaces
- A list of heirs, friends, and charities that personal possessions should be distributed to
- Who will take care of pets in the event that neither you nor your spouse can
- Who will take over the guardianship of minor children in the event that neither you nor your spouse can
A living will also need to include:
- Advanced health care directives
- A medical power of attorney
- HIPAA authorization forms
In some states, you don’t need an attorney to help you make a will. Writing a will is a quick and easy online process. However, it’s always a good idea to get expert eyes on your will by hiring an experienced estate planning lawyer. They can advise you on how to make your documents less likely to be contested.
Creating a Trust: The Basics
Making a trust always requires the assistance of an attorney. It’s a private process that cannot be contested.
There are two common types of trusts that you can set up. The first, a living trust, details assets that will transfer property to the beneficiary after death. The difference is that the assets go directly for the beneficiary- the documents will never see probate court.
A testamentary trust allows the named trustee to control the documents via the trustor’s wishes. This means that they may have access to the funds upon coming of age or upon a specific birthday.
You need to create a declaration of trust to provide terms and stipulations for it. You can do this online or with a lawyer.
When Should You Create a Trust?
Unlike a will, creating trust isn’t necessary for most people. In fact, less than 2% of people have a trust set up for them. This is because they’re expensive to create and maintain.
You should create a living trust if and when you have the funds to do so. Your estate will remain private and you will not need to pay probate attorneys or court fees. It’s much easier to transfer estates via a trust.
As for testamentary trusts, they’re essential for trustors who want to give their child or other beneficiaries money while they are still alive. It’s a seamless and simple transfer of assets that can’t be contested.
While wills and trusts share some common factors, they’re ultimately completely separate documents. They have distinct effects in addition to being created and executed differently.
Now that you know the difference between a will and trust, it’s time to learn more ways that you can protect your loved ones in the event of a crisis. Check out the ‘lifestyle‘ tab on our home page for some ideas on how to allocate funds and assets in a realistic and fair manner.