As you have progressed through life, you have done a good job accumulating savings, property and other assets. Now, you may be asking yourself: What do I want done with all of it after I pass away? How can I be sure that my estate will be distributed according to my wishes in a tax-efficient and direct manner?
The answer, in many cases, is to create either a will or a trust. But, how do you determine which approach is best for you? To help with your decision, let’s explore how each one works and discuss some of their major differences.
What is in my estate?
The first step is to understand what is in your estate. This will provide a general idea as to what level of management you may need. Your estate consists of all valuables that you own, including investments, real estate, jewelry, collectibles and life insurance.
What is a will?
A will is a legal document that allows you to make decisions on how your estate will be managed and distributed after your death. It is revocable during your lifetime, which means you can make changes to it at any time when you are alive. You can also appoint guardians to your minor children by using a will. Property that is administrated through a will has to go through probate. Probate is the legal process that takes place when someone dies to authenticate the will and distribute the deceased’s property.
What is a living trust?
A living trust is a substitution for a will that is created while you are alive with instructions on how property is to be managed and then distributed upon your death. It defines who the following people are:
- Settlor – the creator of the trust
- Trustee – the person in charge of the trust assets. The settlor is often named the trustee of the trust.
- Beneficiaries – the person or people who will benefit at any point in the future from the trust
- Successor trustee – the person who will assume the duties of the trustee upon the death or incapacitation of the initial trustee
It is important to note that the settlor must transfer assets to the trust, or the trust is useless. The trustee then manages the assets, and the beneficiaries eventually inherit the assets. While the settlor is alive, changes can be made to the trust. The trust, however, becomes irrevocable (changes cannot be made) upon the settlor’s death.
What is the difference between a will and a living trust?
There are many differences between a will and a trust that are beyond the scope of this blog, but here are some of the most important:
- A will goes into effect only after you die. A trust, on the other hand, can be used to distribute property before or after you pass away. Trusts often have two groups of beneficiaries: one group to receive income during the life of the settlor, and another group to receive any property left over after death of the settlor.
- A will passes through probate upon death of the settlor, which means the courts get involved. This can be a time-consuming and expensive process. A trust passes outside of probate, which can save time and money. Also, because a will passes through probate, it is a public document. Meanwhile, a trust remains private.
- Only property in your name is covered in a will. A trust comprises any property that has been transferred to the trust.
- In general, wills are less expensive to create than trusts. However, there are expenses associated with the probate process (wills pass through probate, trusts do not).
So which is right for you, a will or a trust?
As with many important financial issues, the answer depends on your specific set of circumstances. Generally, a trust requires a bit more effort and expense up front, but it can save time and money upon distribution of the property after you pass away. For some, the best estate plan includes the use of a will AND a trust.
In many cases, a financial adviser can assist in sorting through the pros and cons of each approach in regards to your personal situation. However, consulting a reputable trust attorney is recommended to determine your final course of action. Keep in mind that the trust attorney is the person who will actually create your will or trust.
Until then, enjoy the wealth you’ve worked so hard to build.
Want to learn more? You may be interested in our checklist that covers the most important financial steps you need to take when someone you love passes away. Download Advance Capital’s When Losing a Loved One – A Financial Checklist