Both wills and trusts are important tools in your estate plan.
There is no one-size-fits-all approach to estate planning. Each plan must be custom-tailored to fit the needs of the person or family that it serves to protect. There are virtually no downsides to having an estate plan regardless of how moderate or extensive one's assets may be because of the many practical and protective advantages that are sure to come in handy in the event of the incapacitation or death.
Here are some basic benefits and differences of two of the most common components in an estate plan: the will and the trust.
Benefits of a will
A will is a legal device that lets you lay out how you want your affairs to be handled after you die. Instructions in a will commonly include things like:
1. Naming a legal representative to manage your estate
2. Giving money, real property, or specific personal belongings to loved ones
3. Designating a guardian for the care of minor children, and
4. Outlining your preferences for burial or organ donation.
Naming your legal representative
Your legal representative, or Executor, should be someone you trust, who knows you and knows your wishes. The executor of your estate will be responsible for managing the estate after you die and will have access to your financial and personal records. A person creating a will, the Testator, will often name as executor a family member who also stands to inherit some portion of the estate.
Distribution of assets
Wills allow you to outline exactly what personal property you own and determine who should receive each asset. You can also account for any lifetime gifts your beneficiaries might have already received. This avoids future infighting among your family members who might be counting on inheriting some of those items they've long admired.
Caring for minor children after you're gone
People often assume that if they don't own substantial property, they don't need to make a will. But, wills do more than distribute assets -- they are an important vehicle for determining how minor children should be cared for after you're gone. If you have children with special needs, it's essential you consult an attorney to discuss not only naming an appropriate guardian for your special needs child but also how a special needs trust will be beneficial to ensuring he or she receives ongoing specialized caregiving and other resources.
Funeral expenses and organ donation
The first thing families commonly face when surviving a loved one's passing is how to cover burial expenses. Families often scramble to figure out how to cover expensive burial costs, often turning to crowd sourcing tools like GoFundMe or engage in frantic pooling of resources from relatives and friends. Describing what burial decisions you would prefer or whether you'd consent to organ donation is not only instructive for your survivors but also, well, more considerate than leaving them with the confusion of having to guess what you would have wanted and how to pay for it. It will also save time, stress and heartache in case your family is the type to argue over these kinds of decisions. Earmarking funds for burial and stating your decisions in a will is the easiest way to ensure your true wishes are honored.
About trusts
A living trust is legal document that allows the person creating it to distribute property before, during or after death and is often used for asset protection purposes. At its core, a living trust represents a three-part arrangement where assets are transferred during your lifetime into trust by the owner of property to be managed by a trustee on behalf of beneficiaries. It is noteworthy that living trusts provide some level of asset protection depending on the type of trust created.
There are many types of trusts that serve different purposes. Living trusts, often referred to as revocable living trusts are useful estate planning devices that help the creator of the trust, the Trustor or Grantor, to retain control over the trust property and how it is used. Revocable living trusts can be modified at any time, hence the name, but do not provide much tax benefit or protection from creditors. Irrevocable trusts, however, may not be revoked, and depending on the type of irrevocable trust, there may be significant tax savings along with protection from creditors since the trust property is no longer accessible to the trustor. Irrevocable trusts are much more complex than revocable living trusts.
Wills vs. Trusts
A key difference is that wills take effect only upon death, while trusts typically take effect once they are created.
It's important to note that trusts are much more dynamic estate planning tools and provide many options so it's best to discuss the benefits of the different types of trusts and your particular situation and needs with an estate planning attorney to determine what's the right option for you. If you are primarily concerned with the tax savings for your estate, you should also consult with a tax specialist or qualified financial advisor.
Another big distinction is that wills are subject to the probate court process, which means that a court supervises the distribution of assets according to the terms of the will. The probate process requires certain formalities and therefore, associated court costs. Trusts however, avoid probate and provide a much smoother transition for property to immediately pass according to the terms. Depending on whether you have a revocable living or irrevocable trust, where property can be immediately transferred upon the making of your trust, or a testamentary trust that instructs your will to transfer property at the time of your death, trusts can reduce the added hassle of expensive, time consuming and public probate processes.
Because each estate planning tool has its own unique benefits and protections, it's ideal to create a comprehensive estate plan that includes both a will and a trust along with other instruments such as health care directives and powers of attorney.
For more information or to schedule a free consultation, visit www.relatelaw.com.