Certainly everyone is familiar with the estate planning terms “will” and “trust,” but not everyone understands the differences between the two estate planning tools. Wills and trusts are both useful estate planning instruments that serve very different purposes. Despite their dissimilarities, both can work together to create a comprehensive estate plan.
Wills and trusts are needed for estate planning
Regardless of how old you are and how much money you may have, it is important to prepare yourself and your family for the chance that you may become incapacitated. You must also prepare for your inevitable death. Estate planning is the way to accomplish that. Wills and trusts are just two of the basic tools that can be used in your estate plan. Your estate plan needs to be customized to fit your unique goals and the future desires you have for your family.
Why planning ahead is important
Planning ahead is very important for several reasons. First, having a plan gives you a way to decide who you want to inherit your property when you die. You get to make that decision now. Second, through wills and trusts and other estate planning tools you have the chance to reduce estate taxes and probate fees as much as you can. Finally, in the event you ever become debilitated in some way, even if it is only temporary, your estate plan can provide a way for your family to take over managing your financial and medical matters, if necessary.
What is a last will and testament?
A last will and testament is basically a written legal document that describes to those who survive you exactly how you want your estate to be distributed at your death. Wills are very useful estate planning tools because they can be revised or revoked at any time before your death or before you become incapacitated.
What is a trust?
Two of the major goals of a trust are to reduce estate taxes and to avoid probate, if possible. A trust is basically a fiduciary agreement. That means it is grounded in confidence and trust. The agreement is between two parties: the trustee and the grantor, or creator, of the trust. A trust agreement essentially authorizes the trustee to hold and manage the assets in your trust for the benefit of your named beneficiaries. The trust agreement will also provide detailed instructions regarding how to manage and distribute your trust property.
When do they become effective?
One main difference between a will and a trust is that a will goes into effect only after your death. A trust, on the other hand, takes effect as soon as you create it unless you specify otherwise. While the will directs who will receive your property at your death, a trust can be drafted to begin distributing property before death, at death or afterward – whichever you choose.
The beneficiaries are different
With a will, you can name beneficiaries to receive an estate at your death. With a trust, there are generally two types of beneficiaries: the ones that receive the income and possibly principal from the trust during their lifetimes, typically the creators of the trust and those that receive the remaining assets after the trustors have passed away.
What property does it control?
A will can basically control any property that is only in your name when you die, but it only controls the property that you specify. It does not cover any property that is held in joint tenancy or in a trust. A trust, on the other hand, covers only property that has been transferred to the trust. In order for particular assets to be included in a trust, it must be retitled in the name of the trust.
Trusts avoid probate but wills do not
Another difference between wills and trusts is that a will must go through probate while a trust does not. That means a court oversees the administration of the will and confirms that the will is valid. The court also makes sure the property gets distributed according to the wishes of the deceased. Trust property is transferred outside of probate, so the court is not required to oversee the process. Therefore, trusts can save time and money.
Wills and trusts have their own advantages and disadvantages
Both wills and trusts have their own pros and cons, depending on the needs of the client.
For smaller estates that do not involve real estate, a will may be sufficient to pass assets at death. However, the will should be supplemented with both a financial and health care power of attorney.
For larger estates or estates that include real estate, a trust will most likely be a better choice than a will.
If you have questions regarding wills and trusts, or any other estate planning needs, contact the Northern California Center for Estate Planning and Elder Law for a consultation, either online or by calling us at (916) 437-3500.
- Estate Planning and Charitable Giving — Key Points - March 29, 2020
- Over-Funding Your Retirement Plan: A Potential Estate Planning Problem - March 27, 2020
- Best Places to Retire: State Taxation - March 25, 2020