What is The Differences Between Wills and Trusts?

Planning for the end of our lives can be a grim task, but most of us want to take care of our families after we are gone. When you make preparations and plans regarding what happens to your possessions and money after death, it is a simpler process for those you leave. Heirs may end up spending additional time, money, and emotional energy to honor your wishes after you’re gone.

Your plans are directed through estate planning tools like wills and trusts. The process is called estate planning and is usually guided by experts in the field. People wonder which one is better and more appropriate, a will or a trust. What are the differences between a will and trust? A legal firm with an estate planning attorney advises individuals in creating both wills and trusts for better estate planning. Keep reading to find out the basic concepts of a will and trust.

What is The Differences Between Wills and Trusts? - difference between will and trust

What is Estate Planning?

Many people don’t realize that they have an estate regardless of the amount of money and possessions they may have. Nearly everyone has an estate. Your estate consists of everything you own: your car, home, other real estate, checking and savings accounts, investments, life insurance, furniture, and personal possessions. These are all things that you own and cannot take when you die. Having an estate plan is important to simplify issues that can arise after your death.

Who Needs Estate Planning?

Just about everyone needs to do estate planning. To ensure that your wishes are carried out when you pass, you need to provide instructions stating whom you want to receive something of yours, what you want them to receive, and when they are to receive it. And, you will want this to happen with the least amount of taxes incurred, legal fees, and court costs. It is recommended to use an estate planning attorney for advice on the most appropriate estate planning tool or tools for your specific estate needs. Your taxable estate, whether you have minor children, the need to transfer property, the needs of family members, and complex estates can create complicated issues that are all reasons to involve an estate planning attorney.

What Does Estate Planning Involve?

Estate planning involves making a plan in advance, naming people or organizations that you want to receive the things you own after you die, and taking steps now to make carrying out your plan as easy as possible later. Proper estate planning accomplishes these tasks and more:

  • Include instructions for your care and financial affairs if you become incapacitated before you die
  • Include arrangements for disability income insurance to replace your income if you cannot work due to illness or injury, long-term care insurance to help pay for your care in case of an extended illness or injury, and life insurance to provide for your family at your death
  • Provide for the transfer of your business at your retirement, disability, incapacity, or death
  • Name a guardian for your minor children’s care and inheritance
  • Provide for family members with special needs without disqualifying them from government benefits
  • Provide for loved ones who might be irresponsible with money or who may need protection from creditors or in the event of divorce
  • Minimize taxes, court costs, and unnecessary legal fees, which may include funding assets into a living trust, completing or updating beneficiary designations, or otherwise aligning your assets with your estate plan

What is Probate?

Probate is another word for estate administration. It is the process that is completed when a decedent leaves assets to distribute such as bank accounts, real estate, and financial instruments. Probate is the general administration of a deceased person’s will or the estate of a deceased person without a will.

You can avoid high probate costs and complexities by having an authenticated will or using investment vehicles that do not require probate.

Basic Differences Between Wills and Trusts

A will is a simple legal document that provides instructions on how to distribute property to beneficiaries after death, while a trust is a complex legal arrangement that allows you to transfer ownership of property, is managed by a third party, and is distributed to beneficiaries at any time determined by the creator

What is a Will?

A will is a document where your division of assets is specified and becomes effective only after the death of the creator. Generally speaking, a will is a legal document that coordinates the distribution of your assets after death and can appoint guardians for minor children.

A will needs to be signed by the creator, and a witness needs to be present. The legal document needs to be submitted to the probate court after the creator’s demise. Only a designated executor can carry out the wishes specified in the will. It is a public document under the records of the probate court. The probate court oversees any disputes regarding the execution of a will.

Why is a Will Important?

A will is important to have, as it allows you to communicate your wishes clearly and precisely by directing what goes to whom in your estate. If you die without a will, your wishes may not be carried out and decisions about your estate will be given to judges or state officials. This can be a source of strife for the family.

If you want to ensure there are no gaps in your estate plan, you can have both a will and a living trust.

What is The Differences Between Wills and Trusts? - difference between will and trust

What is a Trust?

Using a trust is an effective estate planning tool. A trust can be used to determine how a person’s money should be managed and distributed while that person is alive or after death. It enables the transfer of assets from the owner to the trustee.

A trust helps an estate avoid taxes and the probate process. During the probate process your assets become public record and many people would rather keep this information private. It can protect assets from creditors and dictate the terms of inheritance for beneficiaries. While wills become effective after death, trusts become effective after the transfer of assets.

The trust owner can set up terms for the management of assets and how the assets will be ultimately distributed. The trustee is required to handle the assets according to the terms of the trust document. All assets in the trust should be handled keeping in mind the best interest of the beneficiaries.

Reasons to Create a Trust

Many people want to avoid the probate process when they pass and a trust does this. You may want to create a trust to be specific about how, when, and to whom your assets are distributed. Many trusts have special uses to meet various estate planning goals for instance to give to charities, to protect assets, and to reduce estate taxes.

Types of Trusts

There are two basic trust structures–revocable and irrevocable. Revocable living trusts can be changed after they are created. A revocable living trust allows you to specify how your assets should be handled during your lifetime as well as how they are distributed upon your death. A primary benefit of transferring assets into a revocable trust is the ability to avoid the probate process.

On the other hand, an irrevocable trust usually cannot be changed, amended, or terminated after it is created without the permission of the grantor’s beneficiary. Irrevocable trusts require the creator to give up control of the assets that are put into them. The primary reasons for setting up irrevocable trusts are to help protect assets and reduce federal estate tax.

Here is a list of common types of trusts:

  • Irrevocable trust
  • Living trust
  • Spendthrift trust
  • Charitable Remainder trust
  • Special Needs trust
  • Asset-Protection trust
  • Testamentary trust
  • Revocable trust
  • Credit Shelter trust

Revocable Trust

Revocable trusts, also called revocable living trusts or simply living trusts, can be created to serve various purposes both during the lifetime and the death of the grantor. While you are alive, you can create a revocable trust. A revocable trust attorney will help you amend the terms of the trust or terminate it at any time.

The grantors of revocable trusts (living trusts) continue to be the owners of assets in terms of tax purposes. The trust document includes a successor trustee who will take over the assets after the death of the grantor. A trustee also becomes responsible for managing the trusts if the grantor becomes incapable of handling their assets.

Individuals can avoid the probate process by using a revocable living trust. Therefore, the person’s assets will be transferred seamlessly while loved ones are mourning your death. However, the assets included in a revocable living trust fall under the grantor’s taxable estate, meaning that federal estate and income taxes are not avoided.

Irrevocable Trust

As stated earlier, the purpose of establishing an irrevocable trust is to move the assets from the grantor’s (creator’s) control and name over to a beneficiary. This reduces the value of the grantor’s estate in regard to estate taxes and it protects the assets from creditors. Irrevocable trusts are critical tools for certain estate planning needs.

By having effectively transferred all ownership of assets into the trust, the grantor legally removes all of their rights of ownership to the assets and the trust. While the tax rules vary between jurisdictions, the grantor can’t receive these benefits if he/she is the trustee. The assets held in the trust can include (but are not limited to) a business, investment accounts, financial accounts, retirement accounts, cash, and life insurance policies.

Types of Irrevocable Trusts

There are two types of irrevocable trusts: living trusts and testamentary trusts. A living trust is originated and funded by an individual during their lifetime. Some examples of living trusts include:

  • Irrevocable life insurance trust
  • Grantor-retained annuity trust (GRAT)
  • Spousal lifetime access trust (SLAT)
  • Qualified personal residence trust (QPRT)
  • Charitable remainder trusts
  • Charitable lead trust

What is The Differences Between Wills and Trusts? - difference between will and trust

Why Use an Irrevocable Trust?

An irrevocable trust has many applications in planning for preserving a person’s assets and distributing assets of an estate. It is a tool that provides a way to avoid probate, transfer property, save on federal estate tax, and is especially useful for complex estates. Here are a few reasons for using an irrevocable trust:

  1. Taking advantage of the estate tax exemption and removing taxable assets from the estate. Property that is transferred to an irrevocable living trust is not counted toward the gross value of an estate. These trusts are especially helpful in reducing the tax liability of large estates.
  2. Preventing beneficiaries from misusing assets since the grantor can set the conditions for distribution.
  3. Gifting assets to the estate while retaining the income from the assets.
  4. Removing appreciable assets from the estate while providing beneficiaries with a step-up basis in valuing assets for tax purposes.
  5. Gifting a principal residence to children under more favorable tax rules.
  6. Holding a life insurance policy that effectively removes the death proceeds from the estate.
  7. Depleting one’s property to ensure eligibility for government benefits such as Social Security income and Medicaid for nursing home care. These trusts can also be used to secure benefits and care for a special needs child by preventing disqualification of eligibility.

Irrevocable Trust vs. Revocable Trust

As long as the creator is mentally competent, a revocable living trust can be amended or canceled at any time. In effect, the creator can cancel a revocable trust and reclaim property held by the trust at any time before death. So, if you want to manage the trust yourself and think you may want to modify it in the future, it makes sense to use a revocable trust.

However, a revocable trust does not provide the same protection against legal action or estate taxes as an irrevocable trust does. While the revocable trust is more flexible because it can be changed, the irrevocable trust has advantages such as creditor protection. If you need to minimize estate taxes, access government benefits, and protect assets, you should hire an estate planning attorney to help you determine the best type of irrevocable trust to use.

Another Type of Trust–Testamentary

A testamentary trust is a specific type of trust that is created as part of a last will and testament. It provides for the distribution of all or part of an estate. Generally, these trusts are irrevocable by design. These are created after the death of the creator and are funded from the deceased’s estate according to the terms of the will. The only way to make changes to a testamentary trust is to alter the will of the trust’s creator before they die.

Usually, testamentary trusts are created for transferring assets to young children, relatives with disabilities, or those who may inherit a large sum of money that enters the estate upon the grantor’s, also called the testator’s or settlor’s, death.

A testamentary trust is provided for in a last will by the settlor who appoints a trustee to manage the funds in the trust until the beneficiary takes over. The trust takes over at the completion of the probate process after the death of the person who has created it.

This type of trust lasts until it expires, which is provided for in the trust’s terms. Typically expiration dates may be when the beneficiary turns 25 years old, graduates from school, or gets married.

Contact a Living Trust Attorney Today

Most attorneys will charge for a consultation about living trusts, but Estate Law Center hosts weekly workshops to help people learn about the estate planning process. Attending this information-packed workshop is free and completely no obligation. If you’re near Alpharetta Georgia, you can attend our in-person workshops. They are also hosted by estate planning attorneys so you can rest assured that the information you are getting is legally sound.

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