It’s not very pleasant to think about what will happen after your death, but planning ahead will help your heirs avoid obstacles and receive the greatest benefit from any inheritance that you pass on to them. It will also reduce the burden on them as they’re grieving your loss. Furthermore, it will give you peace of mind that your wishes will be carried out.
When one spouse dies, assets usually pass to the surviving spouse with little or no issue. In most cases, the surviving spouse won’t even pay gift or estate taxes. However, when assets pass to another generation, like to your children, the inheritors could face many issues if there isn’t a will or trust in place.
Wills and trusts work differently, so it’s important to know what each does so that you can decide which is best to handle your estate. In this article, we’ll describe the differences between wills and trusts and the pros and cons of each.
What is a will?
The primary purpose of a will is to decide what happens to your assets (property, investments, bank accounts, etc.) when you pass away. Wills typically name a specific person to carry out the deceased’s wishes. A will is a legal document that does not take effect until a person passes away.
Another very important function of a will is to name guardians for your minor children. If you do not have a will or do not name a guardian for your children, then your family will have to go through a long court process to have the court appoint a guardian. The person chosen by the court may not end up being the person you would have chosen to raise your children.
In a will, a person decides how to distribute property held in his or her name. However, wills do not distribute property held in joint tenancy (property that automatically passes to a survivor when one of the original owners dies, such as a home that you and your spouse own together), nor does it distribute property held in a trust.
In general, wills are quick to create and are affordable for most people.
Things that can go into a will
Using a will, a person can, among other things, do the following:
- Name guardians for minor children
- Distribute assets (specific possessions, real estate, money, etc.)
- Specify funeral arrangement wishes
- Name specific people you wish to disinherit
Downsides of a will
Though wills serve many helpful purposes, their primary downside is that they must all go through probate court. Probate is a process in which the court oversees the execution of a will to be sure that the person’s loved ones follow his or her wishes. Heirs usually need to hire an attorney to assist them through the probate process, which can be very costly.
Probate can also take a long time, sometimes well over a year, which means that your heirs will have to attend numerous court hearings and wait a long time to settle your estate and gain access to your assets.
What is a trust?
A trust is an arrangement where a “trustee” (one person or institution, such as a bank or law firm) holds the legal titles to property for another person, called the “beneficiary.” The trust names a trustee who controls the distribution of assets to beneficiaries. When a person creates a trust, he or she is often both the trustee and the beneficiary until the time of his or her passing.
One of the primary ways that a trust differs from a will is that it goes into effect as soon as it’s created, even while the beneficiary is alive. You can use a trust to distribute assets while a beneficiary is alive, upon his or her death, or after his or her passing.
Trusts often have two types of beneficiaries. The first set is the person or people who receive money from the trust during their lives. Usually, these are the people who set up the trust and whose assets are in it. The second set of beneficiaries are the heirs who receive whatever is left in the trust after the original beneficiaries pass away.
Unlike wills, trusts do not need to go through probate court when the first set of beneficiaries pass away. Assets go straight to heirs without court involvement, so the assets in the trust and how the trustor distributes them can be kept entirely private.
A trust may provide tax savings for beneficiaries because, usually, they only pay taxes on distributions they get from the trust’s income, but not on the principal. Also, irrevocable trusts may shield assets from creditors. However, revocable trusts do not typically offer this same asset protection.
Downsides of a trust
The primary disadvantage of a trust is that it only governs what happens to assets held in the trust. If there are assets that were never put into the trust, the heirs will need to go through probate court once the first set of beneficiaries pass away, which costs the heirs time and money.
Additionally, trusts are generally more expensive to set up and take more active maintenance by the trustor during his or her life. To get the most benefit out of a trust, the trustor needs to make sure that any new assets he or she acquires go into the trust.
Will vs. trust: which do you need?
Your assets, whether you have minor children, how much time you have to plan, and how much you can afford to spend will all influence which estate planning tool is right for you. Get in touch with Redbud Law to discuss your goals and determine whether a will, a trust, or a combination of both is the best way to handle your estate.