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Will vs. Trust: What’s the Difference?

All of us will one day have to think about estate planning. No one enjoys the thought of not being around anymore, but the reality is that each and every one of us will have to make decisions regarding how we want our assets divided up and to whom they should go. Some of us will also have to make the difficult decision of choosing a guardian for our children, as well as deciding who will manage the money left to them. Wills and trusts are legal documents that help ensure your assets are distributed per your wishes. While they are both estate planning tools, they serve people in different ways. Some people will use both, and others will select one or the other to facilitate their estate planning needs. This will often depend on the complexity of the estate, whether minor children are involved and the speed at which you’d like your heirs to receive their inheritance. It is important to have a clear understanding of what each document does and how they are used. Let’s discuss the difference between a will vs. trust.

 WILLSTRUSTS
Defines beneficiariesYESYES
Names executorYESNO
Effective dateAFTER INDIVIDUAL’S DEATHAFTER IT HAS BEEN SIGNED AND FUNDED
Avoids probateNOYES
Designates guardian for minor childrenYESNO
Available for public to viewYESNO
Protection against conservatorshipNOYES
Attorney requiredNOT ALWAYS. A SIMPLE WILL CAN BE DONE WITHOUT AN ATTORNEYYES
Protection during incapacityNOYES
ContestabilityMORE LIKELY TO BE CHALLENGED SUCCESSFULLYLESS LIKELY TO BE CHALLENGED DUE TO ITS ONGOING NATURE
PrecedenceUSUALLY SECONDARY TO TRUSTSTYPICALLY TAKES PRECEDENCE OVER WILLS
Tax benefitsNOREVOCABLE: NO

IRREVOCABLE: YES

Protection from creditorsNOREVOCABLE: NO

IRREVOCABLE: YES

ComplexityUSUALLY, STRAIGHTFORWARDMORE COMPLEX WITH MORE PAPERWORK REQUIRED
Costs$0 – $1,000 (ONLINE, THROUGH AN ATTORNEY, DIY)$1,000 – $1,500 FOR A SIMPLE TRUST AND $3,000 FOR A COMPLEXT TRUST

 

Wills Explained

A will is a legally prepared and bound document that states your intentions for the distribution of your assets and wealth after your death. In the event you have children, a valid will also affords you the ability to designate who will care for them. An executor must be named who will be responsible for handling the estate affairs upon the individual’s death. Without a will, assets will be distributed according to state laws and courts. While wills are designed to control how and when your assets are distributed upon your passing, they don’t control all of your assets. Property that is in your name such as real estate, vehicles, jewelry, or other personal property fall within your probated estate and therefore are under the direction of your will.  Assets with named beneficiaries, such as life insurance and annuities or your retirement, bank, and brokerage accounts are not governed by your will, and instead will be distributed directly to whoever you have designated as beneficiaries upon your passing. There are several types of wills.

Types of Wills

Simple or testamentary: A last will and testament that provides direction on how to distribute your assets upon your death.

Living will: A legal document that lets people state their wishes for end-of-life medical care.

Pour-over will: A will used alongside a living trust. You can use it to transfer assets not already held in your trust before you die into your trust after your death. It operates as a safety net capturing any property you didn’t transfer to your trust while you were alive.

Handwritten or Holographic will: A will that is written, signed, and dated by hand. It is not notarized and typically has no witnesses. Some but not all states recognize holographic wills. Of the states that do, they will also require several requirements. It is crucial you consult with an estate planning firm if you are considering a holographic will so you can avoid the potential pitfalls that go along with them.

Joint will: A joint will is a document created by two people who leave their stuff to each other. For example, a husband leaving everything to his wife. When one spouse dies the other inherits the whole estate. When the surviving spouse dies, their stuff goes to someone the couple named together. It’s a single document two people sign. There are issues with this type of will. The surviving spouse can’t change a joint will even after the death of their spouse. So, if a surviving spouse remarries and has a stepchild, they can’t leave anything in the joint will to that stepchild.

Mirror will: Mirror wills are two wills that are almost identical, usually with each person leaving all or most of their estate to the other. You and your partner are both free to write a new will at any time, so you need to have a lot of trust in your partner since they can write a new will when you are alive or dead changing the plans.

Nuncupative will: A nuncupative will is a last will and testament that’s spoken aloud instead of written down. This is usually because the testator (person making the will) may pass away soon. These wills have rules that differ from state to state. Some states require that the person stating their wishes aloud must be dying. In other states, a nuncupative will is valid only if three or more people witness the person speaking. Some states require a nuncupative will to be written down after being spoken, and other states won’t recognize a spoken will at all.

Trusts Explained

A trust is a legal vehicle that allows a third party, a trustee, to hold and direct assets in a trust fund on behalf of a beneficiary. Many people create trusts to limit hassles and fees for their loved ones, or for charitable giving purposes. Trusts can be used in addition to a will to direct your assets after you die, but trusts offer a number of important planning benefits not included in a will, including privacy, time and tax savings. Trusts can benefit many different people. A general rule of thumb is if you have $100,000 or more and own real estate, you might benefit from considering a trust.

Types of Trusts

Living or Revocable Trust: It allows you to place assets in a trust while you are alive, with control of the trust transferred after you die to beneficiaries that you have designated. It will usually keep your assets out of probate, but more than likely, you won’t escape estate taxes. Ensure you understand the benefits of this type of trust.

Irrevocable Trust: In an irrevocable trust, you can’t change your mind. Once you put assets in the trust and name a beneficiary, it’s permanent. An advantage of irrevocable trusts is that you might be able to reduce your estate taxes because the assets in an irrevocable trust technically belong to the trust, so they aren’t yours. For the most part, there are typically three primary reasons people use these trusts.

Testamentary Trust: A Testamentary Trust is created in accordance with the instructions in a person’s Last Will and Testament and outlines when assets will be given to certain named beneficiaries. A Testamentary Trust goes into effect after one’s death. There are three main parties: a grantor, a trustee, and the beneficiary. The grantor is the person creating the Trust, and they appoint the trustee to manage assets before they are given to the beneficiary. These Trusts are typically used by those who have young children, with the assets being distributed after they reach a certain age, graduate, or get married. There are several benefits to these trusts.

Charitable Trust:  This type of trust allows you to donate assets to a tax-exempt charitable organization or nonprofit of your choice and comes with certain tax benefits. Charitable trusts can also be structured to provide a reliable income stream to you and your beneficiaries for specified amount of time. There are different types of charitable trusts, and they have advantages and disadvantages.

Again, wills and trusts are both excellent estate planning tools. When determining which one is right for you, it’s important to seek professional advice to make sure you’re making the right decision for yourself and your loved ones. An estate planning attorney and/or financial advisor can help you sift through the diverse options available to you and help determine which strategy suits you best.

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Sources:

Nerdwallet. (December 2021). Wills vs. Trusts: Know the Differences.

Forbes. (August 2019). Wills vs. Trusts: Which is Best for You.

https://www.forbes.com/sites/bobcarlson/2019/08/28/wills-vs-trusts-which-is-best-for-you/?sh=34cabc297abd

Motley Fool. (December 2021). Wills vs. Trusts: What’s the Difference?

https://www.forbes.com/sites/bobcarlson/2019/08/28/wills-vs-trusts-which-is-best-for-you/?sh=34cabc297abd

Bankrate. (November 2021). What is a Trust?

https://www.bankrate.com/investing/what-is-a-trust/

Nerdwallet. (December 2021). What is a Trust? Types, Advantages and How They Work.

https://www.nerdwallet.com/article/investing/setting-up-a-trust

Forbes. (August 2018). 9 Reasons Why You Should Consider a Living Trust.

https://www.forbes.com/sites/christinefletcher/2018/08/16/9-reasons-why-you-should-consider-a-living-trust/?sh=6e9ea95135df

Main Street Advisors, LLC. January 2022. Main Street Advisors, Inc. is a Registered Investment Advisor. The articles and opinions expressed in this material were gathered from a variety of sources, but are reviewed by Main Street Advisors, LLC, prior to its dissemination. All sources are believed to be reliable but do not constitute specific investment advice. The views expressed are those of the firm as of January 2022 and are subject to change. These opinions are not intended to be a forecast of future events, a guarantee of results, or investment advice. Any advice given is general in nature and investors must consider their own individual situation. Always contact your financial/investment professional before making any financial decisions. Main Street Advisors, LLC is not responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

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