Two of the most important estate planning documents are wills and trusts. Most people know that wills and trusts determine what happens to your property after you die, but fewer know the difference between the two or how they relate to estate planning.
Both documents are critical to maintaining control over your estate, but they differ in a few key ways. Wills and trusts are handled differently in various states, but most people incorporate both into their estate planning.
Your will dictates how you want your assets managed after your death. It names your beneficiaries and tells your executor - the person appointed to carry out the terms of your will - how to pay your taxes and debts. A will is generally easy to set up but can be difficult for those left behind to manage. That's because wills go through probate, a court system designed to verify the validity of the document and manage a person's affairs. The process itself is costly and often time-intensive. It could take your beneficiaries anywhere from a few months to a year to receive their inheritance.
Still, wills are beneficial because the let you dictate guardianship of any minor children you have and can encompass all of your property.
The biggest difference between a trust and a will is the fact that the former doesn't go through probate. Instead, you appoint a successor trustee to switch ownership of the property after your death. Trusts also allow you to establish certain conditions regarding when and how your assets are distributed. For example, your trust can say your child won't receive his or her inheritance unless that person graduates college. A will can't make this distinction. In addition, a trust keeps the taxes your beneficiaries pay on the property they receive to a minimum. Assets in a will are more heavily taxed. However, a trust must be managed as soon as its created, making it more expensive up front. In addition, your trust must be funded before you die.
Trusts can only deal with specific parts of your property, but they give you more control over them. You can detail exactly how a beneficiary receives their inheritance and keep the taxes they pay to a minimum.
How to Create a Will and Trust
What to Include
The specifics of your will or trust vary depending on the size of your estate and the number of family members you have. That said, a good place to start is to include the following:
- An executor: This person is assigned to carry out the terms of your will.
- A successor trustee: In the case of a living trust, you act as the trustee - the person who manages the property listed in the trust - until you die or are incapacitated. If either of these happen, the successor trustee takes your place.
- Assets: You need to list what aspects of your property your will or trust will cover.
- Beneficiaries: These are the individuals - your spouse, children, extended family and others - who will receive your property after you die.
- A guardian: If you have children under 18, determine who looks after them in your will.
Your will is legal with or without the help of an attorney.
Decide on an Attorney
Technically, you don't need a lawyer to help you plan your estate. Your will is legal with or without the help of an attorney, and people with simple estates can usually create one on their own. However, attorneys are beneficial for people with a large number of assets, a small business, children with special needs or other situations where the requirements and questions might differ from the average person's. Lawyers also know the nuances of the state in which you live and are up to date on the latest legal information. Even if you handle most of the estate planning on your own, an attorney can be a great consultant.
When to Plan Your Estate
It's a good idea to create a will or trust immediately after any major life event, including marriage, divorce, the birth of a child, starting a business or a major medical diagnosis. If you already have a will or trust created, you should revisit it during this time to assess who is important in your life and who deserves the results of your hard work. Still, you don't have to wait for any of these things to happen to get invested in planning your estate. It's never a bad idea to get ahead when it comes to planning your estate
There are many pros and cons to having a will versus a trust, but most people use both to cover all of their assets while exerting some control where they can.