There are many different factors that go into planning out your retirement, such as where you want to live and how you want to spend your days. One matter that people tend to forget is what they want to happen to their estate once they are gone. Figuring out what type of financial legacy you want to leave behind can be challenging. A great way to kickstart this process is to do some estate planning. When it comes to estate planning, there are two common options to choose from: creating a will or a trust. Many people tend to use these terms interchangeably, when in fact they are two separate plans. If you are unsure about the difference between the two and which option is right for you, here is some information that can help you out.
Types of Trusts
Something that you may not know is that there are three types of trusts to choose from. The three choices you have are:
- Revocable living trusts: The person who creates the trust and funds their property into it acts as the trustee during their lifetime. They can make changes to the terms, undo the terms, and move property in or out of the trust’s ownership at will.
- Irrevocable living trusts: These trusts are basically permanent once they are made. Once funding begins and property has been moved, the designated “trustee” has complete care and control of the property. You cannot take back or undo it.
- Testamentary trusts: These trusts are created by the individual who writes a trust in the terms of their last will. This is not a “living trust” in the sense that they do not exist until the testator has passed away. The executor of the estate creates the trust as a part of the probate process. The probate process is the legal process through which a deceased person’s estate is properly distributed to heirs and designated beneficiaries and any debt owed to creditors is paid off.
When Each Takes Effect
The main difference between a will and trust is when each takes effect. In the case of a will, it goes into effect after the death of the testator. When it comes to a trust, though, it goes into effect as soon as it is signed. Something you should note is that, generally, someone who forms a revocable living trust will assign a successor trustee to take over management of the trust after they are gone. A benefit that both wills and trusts share is that you can change anything you want on either document up until the time you pass as long as you are still mentally competent.
What Each Covers
Another big difference between a will and a trust is what it covers. While many believe that each document covers the same features, this is not the case. To help you gain a better insight into what each plan covers, we broke down each plan’s coverage below.
- Will: A will can govern the disposition of property owned in your sole name at the time of your passing. This includes interests you might have in property, such as a tenancy in common. It cannot address assets that pass directly to a beneficiary by contract or by operation of law, such as life insurance policies or joint tenancies with rights of supervision.
- Trust: A living trust will govern and distribute any property its been funded with. The granter transfers their assets into it after it’s formed. They can include life insurance policies if the trust, and not the granter, owns the policy, as well as tenancy-in-common interests.
Along with all the differences we’ve talked about today, there are other differences that should be noted. When it comes to a will, some other differences include:
- Requires probate to legally transfer to living beneficiaries.
- It becomes a matter of public record once it is submitted for probate.
When it comes to a trust, here are the prominent differences:
- Terms of a living trust remain private.
- Property passing under the terms of revocable and irrevocable living trusts avoid probate.
- A trust can continue to hold property for the benefit of certain beneficiaries after granter’s death, such as minor children who must reach a certain age to receive their share.
- Trusts can provide life by allowing provisions for disability to be written if needed.
Although there are some distinguishable differences between wills and trusts, they both can provide many benefits to their testator. In the case of a will, the benefits include:
- Simplicity of establishment
- Testator can draft their will with little to no upfront costs
- Allows you to plan for more personal matters, such as funeral arrangements, the raising of children, care of surviving pets, etc.
For the most part, a trust has many of the same benefits as a will. The only other benefits a trust offers includes:
- Allows protection of financial privacy by avoiding probate
- More control of the estate’s assets
- Avoids traditional estate taxes
All in all, planning out what happens to your estate once you are gone is something everyone should do. By having a plan set out, you can enjoy your retirement knowing that your assets will end up with who you want. One last thing: keep in mind that this is not professional legal advice. Make sure to speak with all appropriate parties such as estate attorneys to determine what is best for you.