What Are the Differences Between Wills and Trusts?

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What Are the Differences Between Wills and Trusts?

Female Friend Helping Senior Woman To Complete Last Will And Testament At Home
Photo by monkeybusiness – Elements.envato.com

As we age or as our medical needs shift, we must start considering setting up a will or a trust for our loved ones. It’s not an easy thing to consider but ensuring that your estate is safely transferred will most definitely make things easier for the people you’re leaving behind.

First and foremost, after you pass away, your family and friends should be given the opportunity to mourn. Sadly, in some cases, they may be overwhelmed with court visits attorney meetings if you don’t set your will or trust up appropriately.

One important thing to keep in mind that it’s generally easier for your estate to be passed down to your spouse. The United States Estate and Gift Tax Law makes it so that surviving spouses will not incur a gift or estate tax liability after your wealth is passed on to them. Things get a little bit trickier when children or grandchildren are involved.

After you pass away, leaving your estate to a subsequent generation is a bit more of a delicate process and there are two ways to go about it. One of the biggest mistakes elderly Americans make is expect their families to ‘sort it out’ between themselves. Sadly, however, plenty of cases in which the wills or trusts hadn’t been taken care of properly have proved that even the happiest of homes can suffer from such mistakes.

But should you leave a will or a trust behind? What are the key differences between the two documents and is one better suited for passing down assets to a subsequent generation than the other? Today we will answer all your burning questions.

Wills

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We’ll start with the will since a will can encompass a trust and the two aren’t always mutually exclusive. It is also known as a testamentary will, a legally enforcible document that covers how you wish for yout affairs to be handled after you die.

Wills are especially important in case you have any minor-ages children or beneficiaries. Through this document, you can appoint a guardian for your children. Not doing so will force your family to go through a probate court where a guardian will be appointed. Of note is the fact that whoever you might have wished to appoint and whom the court appoints may not be the same person.

Beyond guardianship, a will can also encompass passing your estate to a minor child, but this decision will be carried out by a presiding judge.

Can you address how you would like your beneficiaries to use what you have left them? Within reason, yes. Furthermore, you may disinherit a child or a spouse as well, but only under specific circumstances and only through a will. All states have different laws that govern such decisions so you must find out whether you live in an equitable distribution state, a community property state, or a common law state. If you live in a community property state, yes, you may disinherit your spouse.

We advise you to seek legal counsel when you’re ready to create your will. You should also be aware of the drawbacks of a will such as your estate becoming part of public records, or the fact that you cannot avoid a probate court if you chose to pass down your estate through a will. Furthermore, probate attorneys can be expensive and you can only avoid them (and their fees) in California and Wisconsin. Keep in mind that your loved ones might be caught in the court system for quite some time.

Other than that, wills are indeed effective and, for most people, they may be the proper tools for leaving something behind for your loved ones.

Trusts

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Trusts require four things in order to be considered valid: the trustor, the trustee, the successor trustee, and the trust beneficiaries. Through this legal document, you will give another party authority to handle your asses for the benefit of a third party, namely your beneficiaries.

Though there are many types of trusts, they can generally be split into two categories: testamentary and living. You can create a testamentary trust through a will. Today we will mainly focus on a revocable living trust, as with this document you can help your loved ones avoid probate court after your passing.

The trustor or property owner creates the trust while they are still alive, thus ‘living’ trust. The ‘revocable’ part of the name means that the trust may be subject to change while the trustor is still alive. The trustor also maintains ownership of the property until they pass away, when the trust becomes operational.

Going this route is typically more expensive, but you will also avoid attorney and court fees, unlike in the case of a will. As such, your estate can and will be passed over to your beneficiaries immediately with the help of a trustee. The trustee will control the distributions of the assets in accordance with your wishes, as outlined by the document.

Some people prefer setting up trusts because it allows their beneficiaries to avoid probate court. The assets are passed directly thus making the whole process easier and faster, especially during a period of time in which your loved ones should be given time to grieve, not worry about legal documents.

Keep This in Mind

From all viewpoints, it is best to just avoid probate court altogether. Not only will your heirs spend months if not years through this process but you might also lose and additional 2%-4% of your estate to court and attorney costs.

This section of the judicial system is responsible for setting trusts, wills, guardianships, and conservatorships and it can clear up any mistakes made by you. However, if you do everything by the book there are ways to avoid this step. No matter which route you pick it is best to have legal counsel present.

Bottom Line

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You should always seek the advice of a professional advisor when it comes to taxes, investments, and legal matters whether you chose to go with a trust or a will.

Both trusts and wills give you some freedom on how you will control your assets after you pass away but, generally, trusts are considered to be more tedious to set up. They must also be actively managed, which could be extremely beneficial for some people and a constant headache for others.

You can save money and time for both yourself and your beneficiaries by setting either of these documents up. If you do not have an estate transfer plan, the federal government and the state in which you live will have one for you!

We know that thinking through all of these legal issues might be morbid to some people. As unpleasant as it may be, however, we believe it’s important that you set up one of these documents both for your own peace of mind and in order to help your heirs and beneficiaries

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