Wills and trusts are estate planning documents that provide guidance for your family and loved ones after your death. However, you might think of them as almost like vehicles. A will is a simple bike that can take you from one place to another. A trust can morph into a car, truck, bus, or semi-trailer, designed to achieve your goals. It can serve different functions and carry multiple burdens (responsibilities).
What is the difference between a trust and a will?
While wills and trusts may seem similar, they are two means to achieve different goals. Here’s how they differ.
Purpose
A will is a document intended to distribute your assets and specify who you want to care for your child if you die. For example, a will designates who should be the guardian of any minor children if both parents pass away. You can also name the person you wish to manage your financial affairs after your death.
A trust is a means of transferring your assets but can serve different functions depending on the type of trust and what the trustee entails. Trust uses can include:
- Reducing estate taxes
- Protecting beneficiaries from creditors
- Preserving assets for minors until they become adults or reach specified ages
- Benefiting charitable organizations
- Managing property in multiple states
- Providing care for a special needs child
For example, parents often use a trust if there’s a young adult involved. “If you have a college-aged child, do you really want them to inherit a million dollars and spend it on cars and fuel and motorcycles?” Roof said. A trust can specify that money be distributed gradually at ages 18, 25, and 35. Or you can include rules stating that the funds must be used for health, maintenance, education, and support.
Note: There are two main types of trusts: revocable trusts and irrevocable trusts. Each type of trust has its own advantages and disadvantages.
When it becomes effective
A will takes effect after death. If you become unable to carry out duties due to a mental or physical impairment, the will will no longer be available or effective in court.
In contrast, a trust can be set up to become effective even while you are alive. For example, you can create a trust so that another person can manage money, property, and other assets if you are ill or unable to do so. A trust can also come into effect after your death or loss of mental capacity. Trusts are much more flexible regarding when they become effective.
Probate
A will must almost always go through probate to ensure its validity. The probate process will be public information. Probate can be expensive and take longer. Assets in each state must go through the probate court in that state.
Note: Some states, like Minnesota, set a small estate value that does not need to go through probate.
Creation costs
A will is simpler and less expensive to create and manage compared to a trust. Some companies may charge between $395 and around $1,000 to create a will for a single person. Pricing depends on your situation and whether your will package includes items like a healthcare power of attorney or financial power of attorney.
A trust requires more attorney time to discuss the options that apply to your situation, then draft the document. The typical estimated cost to create a trust can vary widely depending on your situation and what you wish to achieve with the trust. Expect to see pricing anywhere between $850 and $3,050 for a single person.
Of course
You can also use online will and trust sites to create documents for free up to $200, although there is controversy about DIY wills and the validity of these documents.
Note: If you hire a professional custodian to manage the revocable trust while you are alive, they will likely charge you fees ranging from 0.5% to 2.0% of the total value of the assets in the trust.
“You can choose to have a family member, such as your mother or daughter, manage your trust, and they may not charge any fees,” Roof said. “We often see this with elderly parents in nursing homes, and the son or daughter manages the trust on behalf of their parents without charging fees.”
Special Considerations
Some assets may not need to go through probate court, even if you only have a will. For example:
- Joint bank accounts and jointly owned property
- Bank, retirement, and life insurance accounts that name someone as a beneficiary
- Some properties, depending on how they are titled
Note: Wills available in many states can transfer property to someone you name after your death.
Which is Right for Me?
Everyone’s circumstances are different, and there is no one-size-fits-all formula for deciding between a will and a trust. However, there are some questions you can ask yourself that may guide you toward choosing a will or a trust.
A simple will may be right for you if you:
- Want to choose who will manage your affairs after your death
- Have children and want to make decisions about their guardianship
- Want to direct your assets after your death instead of the state (if you do not have a will)
- Do not have many assets or complex assets
Some types of trusts may be right for you if you:
- Want to appoint a trustee to manage your assets, even while you are alive
- Have assets in multiple states
- Are concerned about privacy
- Want more control over how and when assets are distributed
- Are worried about an adult child’s spending
- Have a loved one with special needs or who is not a U.S. citizen
- Hope to provide easier and quicker access for your beneficiaries to your assets
Note: Some attorneys may also suggest a trust for elder care planning, tax planning, or gift planning.
The Best of Both Worlds Option
Many people can benefit from having both a will and a trust. The right vehicle (document) for you depends on your situation, state law, and what you hope to achieve after your death.
In fact, you can create a trust within your will and name your trustee for that trust. Even if you create a revocable trust – which can be seen as similar to a will – you will likely also create a “pour-over” will to address any assets not covered and to name a guardian for your minor child.
Most attorneys have an estate planning package, according to Roof. This includes:
- Will and testament, if necessary
- Healthcare proxy
- Advanced medical directive
- Power of attorney
Conclusion
A trust can be a powerful tool for managing your financial legacy in this life and after your death. A will is a simpler tool for distributing your assets and appointing a specific person as guardian for a minor child.
Depending on your situation, you may choose one or both – but it is wise to consult on the appropriate approach. Without a will or trust, state courts may make all the big decisions. “Often, the way the state views your assets for distribution is not how you intended,” Roof said.
Frequently Asked Questions
Can I change the trust or will?
You can always make changes to a will or revocable trust by following your state laws regarding changes. Simply crossing out sections will likely not be valid in court. You should consider updating your will in the case of a significant life change, such as moving to a new state, changes in tax law, or changes in the value and type of your assets. You cannot change or revoke an irrevocable trust, which is why they are rarely used.
Is it possible to…
Can I make my will or trust myself?
Many online services and templates offer DIY wills and trusts, and some states allow handwritten wills. However, if you do not follow state law, your will may not be honored, and your property may not go to the people you wish. Only an experienced attorney can ensure your estate plans are executed properly and comply with state laws.
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Source: https://www.thebalancemoney.com/difference-between-a-will-and-a-trust-3974765
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