You’ve probably heard the terms “will” and “trust” and think they have something to do with giving away your assets to other people. But what’s the difference?
Clearly there’s a lot of confusion and procrastination surrounding the use of these tools in estate planning. According to a recent survey, over half (56 percent) of U.S. parents don’t have a will or living-trust estate planning document. Here’s a brief overview of differences between these two tools.
A will is a legal document that, with court approval, empowers someone you name to wrap up your affairs after you pass away and names who will inherit your assets. If you have minor children, you can nominate a person to serve as their legal guardian.
A probate court typically administers this process, but most states have a non-court process in place for small estates. A will first gives instructions to an executor to pay the expenses of your last illness, funeral expenses, unpaid taxes and other debts, and then tells the executor about who will inherit your assets and what assets they will inherit.
Most wills for larger estates go through the court-administered process called “probate.” During this process, the court determines if your will is valid, hears any objections to it and appoints your executor (usually the person you name), and then monitors the executor until all your debts are paid and your assets delivered to your heirs.
Wills do have limitations.
Caution: Without a will, you die “intestate,” and the court decides what happens to your assets based on the way the law instructs. This is called “intestate succession” and might mean your assets go to people, or in ways, that you would not want. Also, without a will, the court could decide who will become responsible for your minor children, and it might not be someone whom you would have chosen.
So how is a trust different? A trust is a contract between you and a “trustee,” usually a person or company you know and trust. The trustee holds title to the property you give the trustee in trust and administers it in accordance with the terms of the contract for the benefit of the beneficiaries of the trust. The property can be almost anything you own – money, your home and other real estate, stocks, bonds, business ownership, collections and other personal possessions.
When you create a trust, you are the “grantor.” The property in the trust is managed by the trustee you name in the agreement. Though your assets are placed in trust, they don’t change location; they just change owner – the John Smith trust, not John Smith.
Most people set up a form of trust called a “revocable living trust.” In a revocable living trust, you typically name yourself as trustee, so you can control your trust’s assets until you are no longer capable of managing your affairs due to disability or death, at which time the person or company you named to be your “successor trustee” takes over. If you don’t make the trust non-amendable, you can reserve the right to change the terms and beneficiaries as long as you are competent.
Why do people choose a trust?
Whether a trust-centered estate plan or a simple will is the right arrangement for you is something that you should decide with the assistance of a qualified estate planning attorney. It is all part of a carefully thought-out estate plan, and it is never too early to plan, only too late.
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