You want to make sure your loved ones are taken care of after you're gone. And doing so requires thoughtful planning and having the right tools in place. As you look at your options, you may question the purpose of each plan and document. Take a will and a trust, for example. What's the difference? Is there anyone who needs a trust instead of a will, or vice versa? And can you have both?
Setting up a will or a trust can help prepare your estate so your beneficiaries have as easy a time as possible receiving their inheritance. Plus, you can avoid the complications that come with not having them in place and potentially can help your beneficiaries save on taxes.
Here's how these two options differ, what their unique advantages are, and when you may want to have both.
What is a will?
If you don't have a will in place before you die, a probate court decides how to
Even with a will in place, some states require your will to go through probate court, which is why it's important to have an executor in place.
What is a trust?
The 4 main types of trusts
1. Revocable trusts
A revocable trust can be revoked or amended until you pass away or become incapacitated. In this case, you have full control of the trust's assets until your death, and any income earned in the trust is distributed to you. Once you die, the revocable trust automatically converts to an irrevocable trust, and any assets are distributed per the trust's instructions.
2. Irrevocable trusts
Unlike a revocable trust, an
3. Charitable lead annuity trusts (CLATs)
A CLAT makes it possible for you to make fixed payments to your favorite charities over the term of the trust. Once the trust expires, any remaining assets are distributed to the trust's beneficiaries.
4. Special needs trusts
If you have a child or other family member with special needs, you can set up a
When you create a trust, the trust document outlines the name of the person(s) who created it (i.e., grantors or settlors), the beneficiaries and how you wish to distribute your assets. It is important to note that the grantor names the trustee.
Advantages & disadvantages of wills vs. trusts
The main disadvantage of an irrevocable trust is that you can't change it and essentially lose control of any assets you place into it. A revocable trust is more flexible and private, so no details from the revocable trust become publicly known after you pass away. That said, irrevocable trusts have tax advantages that revocable trusts don't.
It's understandable if you want to protect the
If you're worried about creditors coming after your estate, you may find an irrevocable trust gives you a sense of reassurance. These trusts can guard assets against creditor claims, whereas a revocable trust or will can't. It's harder for creditors to pursue claims against a revocable trust than it is with a will, but it's still possible.
Additionally, setting up a trust can be more expensive than setting up a will, and a trust doesn't make it possible to provide guardianship for minor children.
To better understand whether a will or a trust is the right fit for your estate, consider the advantages and disadvantages of each. The following chart highlights the key differences.
|Effective date||After the death of the settlor||After creation|
|Cost||$0 to $1,000||$1,500 to $3,000|
|Protection during incapacity||No||Yes|
|Guardianship for minor children||Yes||No|
|Tax benefits||No||Revocable trusts: No|
|Irrevocable trusts: Yes|
|Protection from creditors||No||Revocable trusts: No|
|Irrevocable trusts: Yes|
How having both a will & trust can help
Many people believe you only need a will or a trust if you have a large number of valuable assets, but
In some cases, the answer isn't to choose between a will or a trust but to have both in place. If you don't articulate how you want your estate divided, you may risk your loved ones fighting over how to manage your estate, which can lead to legal battles. You can use a will or a trust to designate your assets, help your family avoid spending time in court and make your wishes known. If you're looking to help your beneficiaries save on taxes, you may find that setting up both a will and an irrevocable trust can help you accomplish your goals.
It's also worth noting that if you have minor children, even if you have a trust that outlines your beneficiaries, you need a will to designate guardianship.
3 estate management tips
When it comes time to create a will or a trust, you can use the following tips to make the process more streamlined and effective.
1. Get support
You don't have to take on such a large task on your own. You can work with a financial advisor and an estate attorney to create an estate strategy that meets your goals and protects your beneficiaries.
An estate attorney can make sure your will or trust is
2. Document your plans
An estate attorney can help you
3. Plan with your beneficiaries
Speaking of beneficiaries, you don't want to leave them completely in the dark about your plans. While final decisions regarding your estate are up to you, make sure your beneficiaries understand your plans and how to manage the assets you leave them.
Manage your estate today to get ahead of tomorrow
Managing your estate is a big undertaking, and there are many factors to consider when making decisions regarding your estate. This is where working with a financial advisor can come in handy.
If you'd like support, connect with a