Whether you are 20 years old or are nearing retirement, there is never a bad time to start thinking about what will happen to your family and belongings after you die. Many people put off making a will, thinking that it is morbid or only necessary for old people or those with health conditions, but what if you were in a fatal car accident tomorrow? Would you die knowing that your family would be taken care of?
Once you have decided to start the estate planning process, you’ll come across several commonly used terms. Two of those terms are “will” and “trust.” What do these terms mean, and which option should you pick to help distribute your wealth and assets after you die?
One of the main differences is in the timing of when each takes effect. A will doesn’t take effect until you die, whereas a trust takes effect upon its creation.
What is a will?
A will is a document that states who you want to inherit your money, investments, and belongings when you die. It could be a relatively short document if you don’t have much to distribute or a single beneficiary, or it could be long if you are wealthy or have a longer list of beneficiaries.
In your will, you’ll name an executor, which is the impartial (i.e. not a beneficiary) person who will work to fulfill your wishes. Upon your death, your will goes through a legal process known as probate to verify its legality and distribute your assets. Your executor works with the probate court to make this happen. Probate can be an easy process for a simple and straightforward will that is not contested, but it can also be a long and costly process for some.
Even if you don’t have much to your name, it’s a good idea to have a will that states what you want to happen to your assets upon your death. A will does not take effect until you die, and you have the opportunity to make amendments to your will throughout your life to ensure it’s up to date upon your death.
When someone dies without a will, that is referred to as “intestate.” In this case, your state’s intestacy laws will determine what happens to your wealth and assets upon your death. A will helps ensure that your assets go to whomever you name as a beneficiary.
What is a trust?
A trust is a legal arrangement that appoints a third-party trustee to manage your assets in a fund on behalf of a beneficiary. The trustee could be someone you know personally, or it could be an attorney or a bank. The trustee manages and distributes the items within the trust to the beneficiary without needing to use an executor or go through probate.
A trust takes effect upon its creation, as opposed to a will that doesn’t take effect until your death. You can specify that the beneficiaries won’t receive anything from the trust until you die, or you can choose to start distributing income to your beneficiary while you are still alive.
When you create a trust, you will need to transfer ownership of assets from yourself to the trust for those assets to be included. That could help decrease the amount of taxes you pay on those assets.
Pros of creating a will
- Simple to make - While it’s always a good idea to turn to an estate planning attorney to get your affairs in order, a will can be a simple enough document to create on your own. There are several software options out there that help you go through the steps of creating a will, and they typically cost a lot less than a lawyer.
- Providing for your kids - Your will is where you designate guardians for your children. If you don’t name guardians for your children, it would be up to the state to appoint guardians and your kids could end up in the foster system. You can also use a will to name property managers for any assets you leave to your young children. You can’t name guardians in a trust, so if you are a parent it’s imperative that you have a will.
- Debt forgiveness - You can use a will to cancel any debts owed to you once you die. You cannot do this in a trust, so if this applies to you, a will is an absolute must.
Cons of creating a will
- Probate - All wills are required by law to go through the probate system. While probate can be quick and relatively pain-free for many, it can add a lot of cost and time to settling the affairs of the deceased. The executor of your will works directly with the probate court to help manage and distribute your assets, but there is the possibility that the will could be contested during this process.
- Wills are public documents - Once you die, your will is available to the public. If you prefer to keep things private, you’ll likely want to create a trust to help distribute the majority of your assets so you can keep them out of the public eye.
Pros of creating a trust
- Avoiding probate - One of the biggest pros of creating a trust is that it does not go through probate. Avoiding probate means that your assets will be distributed directly to the trust’s beneficiaries upon your death, which saves a lot of time and money.
- Maintaining privacy - Another pro is that the contents of a trust remain private, even after you die. If you are wealthy or famous, this means the general public will remain in the dark about your assets and your beneficiaries. If you have volatile relationships within your family, a trust means they won’t be able to see exactly whom you have left your assets to.
- Not contestable - While the contents of a will can be contested, the contents of a trust cannot. So by putting your property into a trust, you can ensure your wishes will be carried out upon your death, even if one of your family members disagrees with your decisions.
- Protection against disability costs - You can use a trust to ensure your estate is cared for if you become disabled or incapacitated. If your money is safely within a trust, the beneficiaries could use it to pay for your care while you are still alive. Leaving money or property to your beneficiaries in a will means that it wouldn’t be usable by your beneficiaries until you die (or are capable of signing over your assets while you’re still alive).
Cons of creating a trust
- It might be unnecessary - Trusts are good options for people who have a considerable amount of assets when they die. But if you don’t have much to give out when you die, a trust might not be necessary. Creating a trust if you don’t need one adds expense to the estate planning process.
- You can’t name guardians for your kids - A trust allows you to distribute your assets, but you cannot name guardians for your kids in a trust. If you have children, you must have a will that states who should take care of them when you’re gone.
Will or trust, which is right for you?
The answer to that depends on your situation. If your assets are modest, you might be fine with just a will. But a trust offers some additional benefits that a will doesn’t.
If you want to create a trust, you must have some type of will. It doesn’t need to be long and detailed, but it needs to exist. You can use your will to bequeath any assets that are not covered by the trust but that you still want to go to a specific beneficiary.
An online service like Trust & Will) can provide you with the documents for both wills and trusts, and for a flat fee they offer access to estate planning attorneys.
The most important thing is to make a plan
No matter how much money, property, and other assets you have, you should have a will. Without a will, your assets will be distributed by the state rather than by your wishes. You may also choose to have a trust to help distribute your assets while avoiding probate and keeping things private.
But a trust isn’t necessary for everyone. The most important thing is that you have some plan in place to help ensure your wishes are carried out when you die. A good estate planning attorney can provide some insight into the best direction for you.