You have worked hard and accumulated some assets and perhaps you have been thinking about your estate planning. It is only natural that you would want to have a say in what happens to your assets once you die. One question that might come up is whether you need a will or a trust, or perhaps both. What’s the difference?
A will is a legal document that allows you to direct how your property will be given to your heirs when you die. It goes through the probate court system, which is designed to wrap up your affairs after your debts are paid. An executor is named in the will as the person responsible for carrying out your wishes.
A trust is a legal document that establishes relationships. The first is the grantor. The grantor is the person who creates the trust, decides what assets to include, who the trustees are, and who the beneficiaries are. Next is the trustee who manages the property in the trust and is essentially safeguarding the assets for another, known as the beneficiary, and distributing assets, according to the trust’s provisions.
The grantor can be the trustee. If it is you, you will also want to name a successor trustee in case you can’t function in this capacity. The beneficiary could be you during your lifetime and your spouse/child or anyone else at your time of death. There can be as many beneficiaries as you like. The trust also dictates when and how the assets are to be distributed to the beneficiaries. For example, you might want to stagger the ages at which a beneficiary can ultimately have access to a trust’s assets.
If you create the trust while you are alive, it is called a living trust. These are usually revocable during your life, meaning that you can make any changes to the document you wish as time goes on. In order for the trust to function properly, you will need to transfer title, or “ownership” of assets, to the trust. For example, your brokerage account will be transferred into a trust account, IRAs and 401(k)s can name the trust as the beneficiary (if it makes the most sense for your overall plan).
Both wills and trusts let you direct the distribution of your assets to your beneficiaries. Here are some key differences:
- A will requires the public process of probate. Trusts are usually private.
- You must transfer assets to your trust in order for it to work while you are alive. A will doesn’t include this step.
- A trust can manage assets while you are incapacitated. A will works only at your death.
- If you own property in more than one state, you might be able to avoid probate in each state by placing all property in a trust.
- You can name a guardian of your minor children or dependents in a will. Trusts cannot do this.
Having a will or a trust isn’t an either-or situation. In some instances, it is appropriate to have both. You might need a will to name the guardian for your child. A will may also be used to transfer to the trust those straggler accounts which somehow didn’t get transferred into the trust during your life. The bare minimum is that having a will also prohibits the state dictating how your assets will pass to your heirs.
Most everyone needs a will. Having a trust as part of your estate plan may be a good strategy as well. Sorting through the details with an estate planning attorney will help you decide what fits your needs.
Opinions expressed are not necessarily those of Raymond James Financial Services. Information contained was received from sources believed to be reliable, but accuracy is not guaranteed.