If you have any knowledge about estate planning, you have no doubt heard the terms "last will and testament" and "trust." However, do you know how these two estate planning tools different? While it is true both wills and trusts are helpful estate planning devices, they satisfy very different goals. Nonetheless, they can be used together to establish a comprehensive and effective estate plan. Here is what you should know.
Planning ahead should be a life goal for many different reasons. First, having a plan in place gives you the opportunity to determine now who you want to inherit your property when you die. Another reason to plan ahead is so that you can take advantage of the tax benefits and potential for probate avoidance that wills, trusts, and other estate planning tools can provide. Also, an estate plan gives you a way to prepare your family for the possibility that you may become incapacitated in some way. If that happens, usually unexpectedly, your family will need to be able to continue management of your financial and personal affairs for you.
A last will and testament is essentially a written legal document that designates exactly how you want your estate to be distributed after your death. Wills are useful estate planning tools because they can be revised or revoked at any time before your death or incapacity.
A trust is really a fiduciary agreement, which means it is based on confidence and trust between the trustee and the grantor (or person making the trust). The agreement is actually between three parties: the trustee, the grantor and the beneficiaries. A trust agreement authorizes the trustee to hold and manage the trust assets for the benefit of your chosen beneficiaries. The trust agreement also provides explicit instructions concerning how to manage and distribute the trust property. Two of the primary goals of a trust are to reduce estate taxes and avoid probate, if at all possible.
One of the key differences between a last will and testament and a trust is that a will becomes effective only after your death. A trust, however, takes effect as soon as you create it, unless otherwise specified in the trust agreement. On the one hand, a will directs who receives your property upon your death, while a trust can begin distributing property before death, at death or afterwards, depending on how you set it up.
A last will and testament is very flexible when it comes to beneficiaries. With a will, you can name as many beneficiaries as you want, or you can have just one. The choice is yours. On the other hand, there are generally two types of trust beneficiaries: those who receive the income from the trust during their lifetime and those that receive the remaining assets after the first beneficiary passes away.
A will can control any property that is in your name alone at the time of your death. It does not control property that is held in joint tenancy or in a trust. A trust, on the other hand, covers only the specific property that has been transferred to the trust. In order for particular assets to be included in a trust, it must be retitled in the name of the trust. So, if you neglect to include any property in your trust, such as property you acquire after the trust has been created, then it will not be controlled by the terms of the trust.
Another major difference between trusts and wills is that a will must go through probate while a trust actually avoids probate, at least for the property it controls. Through the probate process, the court confirms that the will is valid and then oversees the administration of the will. The court will also ensure that the property is distributed according to the terms of the will. Trust property, however is transferred entirely outside of probate, so the court is not required to be involved. For this reason, trusts can save time and money.
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