Terms You Should Know
Assets – Physical or non-physical resources that typically have monetary value. Examples include cash, real estate, and intellectual property.
Beneficiary – The person or persons you designate to receive your assets after you pass away
Probate
When people die, their assets are distributed according to their will through the probate court process, which serves to legally authenticate the document. This process can take months or years and often involves significant legal and administrative fees. In contrast, trusts are legal entities that hold assets on behalf of their beneficiaries. Assets held in a trust often bypass probate.
Effective Date
A will is a legal document that details how you want your assets to be distributed after death. It has no effect until you pass away and the will is sent to probate court. However, a trust is a legal arrangement that becomes effective once signed and funded. It allows the grantor (the person creating the trust) to manage and distribute assets while still alive.
Privacy
There's a significant difference between wills and trusts when it comes to privacy. Wills become public records once submitted to probate court, while trusts remain private, with only the trustee and beneficiaries privy to the details. This privacy aspect can be crucial for those who wish to keep their financial matters and beneficiaries' information confidential.
Asset Control
Trusts allow you to give specific instructions for how your assets will be distributed. You can use a trust to create rules for how and when your assets will be given to the people you want to receive them. This can include setting up periodic distributions, age distribution triggers, or even incentive-based distributions tied to your beneficiaries' achievements.
Wills typically distribute assets outright to beneficiaries upon your death, with less room for customization.
Complexity and Cost
Trusts are usually more difficult and costly to establish than wills, but they have many advantages that can make the additional work worth it. Trusts can help you avoid probate, manage your assets during your lifetime, and provide more control over the distribution of your assets. While wills have a more limited scope, they are typically less expensive and less complex to create.
Incapacitation
When you create a trust, you can name a successor trustee who will manage the trust's assets if you become incapacitated. This means that if you cannot make financial decisions due to illness, injury, or cognitive decline, your chosen trustee can seamlessly take over the management of your assets without the need for court intervention.
If your will does not include provisions for incapacitation, your family may need to go through a long and expensive court process to appoint a conservator to manage assets on your behalf.
Which One is Right for Me?
To figure out whether a trust or a will is the right choice for you, consider the following factors:
- Complexity of your estate
- Your age and health status
- Your desire for financial privacy
- Your budget for estate planning
- How much control you want over the distribution of your assets
A will may suffice if you have a relatively simple estate and straightforward wishes for asset distribution. However, if you have a larger or more complex estate, value privacy, and want more say over asset distribution, a trust may be the better option despite the higher initial costs.
Understanding the foundational differences between wills and trusts empowers you to make informed decisions about your estate plan and shape your legacy. If you still need help deciding between a will and a trust, click here to learn more about which option best suits your needs.
