Estate Planning vs. Wills vs. Trusts: What's the Difference?
Estate planning is the process of deciding who will inherit your property upon your death and giving power to someone you trust to manage your affairs during your lifetime, should you become incapacitated. While estate planning is not the same as making a will, creating a valid legal will is a part of estate planning.
The estate planning process includes different documents, including a will and various types of trusts. Each of these instruments does specific things. Wills and trusts are limited in their power, meaning that a will cannot do what a trust can do, and a trust cannot do what a will can do. Knowing the difference between these legal documents will help you create a clear and complete estate plan.
Wills and Trusts Have This in Common
- Both determine how your assets are divided at your death.
- Both identify a person to carry out the purposes stated in the document.
What Is a Will?
The purpose of a will is to specify who will be entitled to your assets after your death. Executors and personal representatives are also named in wills. As part of the executor's job, they will ensure your property is distributed appropriately.
Your real estate, personal property, family heirlooms, etc., are all protected by a will. Likewise, you can name a guardian for minor children. Your last will does not take effect until you pass away.
A will is a necessity for everyone. Regardless of whether you have a modest estate or a multi-million dollar fortune, everyone should be able to control what happens to their assets.
In addition, a will must be probated. In simple words, probate is the process of settling your estate (or fulfilling wishes you might have included in your will).
What Is a Trust?
A trust is a legal entity created to hold and manage your assets and other decisions during your lifetime. A person is named trustee once you, as the grantor, give the legal title of the trust property to the trust. After that, the trustee is legally responsible for managing, investing, and safeguarding trust property and income on behalf of your named beneficiaries.
Benefits of Forming a Trust
Forming certain types of trusts offers the advantage of avoiding the probate process. There may be advantages to avoiding probate in some cases because it may protect the family you leave behind from creditors.
Additionally, trusts allow you to limit when beneficiaries have access to your assets. For example, by creating a testamentary trust, you can specify when and for what purpose an asset will be distributed to beneficiaries.
Types of Trusts
Trusts fall into two general categories. Trusts can either be revocable or irrevocable:
- A revocable trust is a type of trust that the grantor can change or cancel at any time. The grantor keeps ownership of the property held in the trust. Because the grantor keeps the legal title to the property they put into trust, they keep the income and must claim the income on their income tax returns.
- An irrevocable trust cannot be changed or ended without the beneficiaries' permission. Once a grantor creates an irrevocable trust, they relinquish legal title to the trust property, giving up their ownership.
A living trust is a trust document created during your lifetime. They can be revocable or irrevocable. The provisions of the trust take effect during your lifetime.
In addition to the ability to designate a guardian who can take care of your wellbeing if you are incapacitated, a living trust allows you to avoid the probate process by transferring the legal title of the trust property from your name to the trust name before your death.
You can control when a beneficiary receives assets to protect a child who does not handle money well. There are fewer legal formalities to create a living trust than to create a last will and testament.
A living trust has annual fees for maintaining the trust. Finally, since a removable living trust can be terminated at any time, the creditor can terminate a revocable living trust, and the creditor can gain access to your assets to help satisfy a debt.
Other Common Types of Trusts Include
- A testamentary trust is created by a provision in a will. This trust document appoints a trustee to manage your assets after your death and distribute them as per your wishes and the law. Testamentary trusts allow you to stipulate the rights to certain assets. Using this trust will enable you to protect your children should you pass away before they can manage a large estate.
- An estate planning document establishes a charitable trust during a grantor's lifetime. Upon your death, a trustee manages the assets you left for charitable or nonprofit organizations.
- A special needs trust provides financial support for individuals with special needs to afford medical care and meet their basic needs.
What Is a Power of Attorney?
In addition to creating a will and trust, you should also consider getting a power of attorney. A power of attorney is someone who will be able to make medical and other decisions on your behalf if you become incapacitated.
An essential part of creating your estate plan is considering estate taxes. Know that both federal and state governments can impose estate taxes.
Estate taxes and inheritance taxes go hand-in-hand. Estate taxes are levied against the estate itself, while inheritance taxes are levied directly against the person who inherits it.
However, most estates will be too small to need to pay estate or inheritance taxes. In 2021, the threshold number for estate or inheritance taxes to apply is $11.7 million.
If you are seeking further information or legal advice, check out FindLaw's directory to contact an estate planning attorney.
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