At some point, you have more than likely heard the terms will and trust, especially if you are looking at doing some estate planning. Often, they seemed to be used interchangeably. However, they do not refer to the same thing at all. Here are some key points to help you understand the difference between the two of them.
What is a Will
A will is a legal document that outlinesyour wishes and instructions regarding what should happen with your property after you die and who your beneficiaries are that will receive the property. A will can also do the following:
- Assign an executor,
- Assign guardians for minor and disabled children and their property,
- Determine how any debts and taxes will be paid, and
- Make provisions for any pets.
What is a Trust
A trust is a legal document, which names a trustee who will have the authority to handle all of your assets and make decisions for the benefit of your beneficiaries. There are two main types of trusts.
A revocable trust is a trust in which the provisions can be altered or canceled by the grantor at any time. During the grantor’s life, the income earned by the trust is given to the grantor and it is only after the grantor’s death that the property is transferred to the beneficiaries. The grantor typically acts as the trustee for the trust during his or her lifetime and will name another individual to act as trustee after she or he has passed away.
An irrevocable trust cannot be changed, amended, or terminated without the permission of the beneficiary. After the assets are transferred to the trust, the grantor cannot change the terms. In other words, the grantor no longer has any rights of ownership to those assets. Irrevocable trusts give the grantor some tax benefits, especially beneficial for those in a higher tax bracket.
There are several key differences between wills and trusts, including the following:
When Wills and Trusts Go Into Effect
A will goes into effect after the death of the individual. A trust goes into effect as soon as it has been signed. A will and revocable trust can be changed at any point of time, as long as you remain mentally capable. An irrevocable trust cannot be changed after it has been signed.
The Property Covered by Wills and Trusts
A will can only distribute property that is listed solely in your name when you die. It does not include any assets that pass directly to a beneficiary such as life insurance policies.
A trust can distribute any property it has been funded with, which were transferred by the grantor after the trust was written. This can include life insurance policies as long as the trust owns the policy and not the grantor.
Wills Go Through Probate
A will must go through probate before any assets can be passed on to the beneficiaries. A trust does not have to go through probate before distributing assets.
When wills are submitted to the court for probate, they go on public record. Trusts will remain private.
A trust can hold assets for beneficiaries who are minor children until they reach the age of maturity. The trustee is entrusted with keeping up and operating the trust and distributing any money or property until that time arrives.
Wills Provide Only for Death and not Life
A will is unable to make provisions if you become incapacitated and are no longer able to make decisions for yourself. A trust is able to include such provisions within the document. A trust can name a guardian to make decisions on your behalf when you are longer able to do so yourself.
While trusts give you more control over your assets, they are more expensive and time consuming to set up.