Most people are far too busy living to think about dying. However, for grieving friends and family, taking care of all the details, from funeral planning to working through legal matters can make the time of someone’s passing extra stressful.
Taking the time to make legal and financial preparations with a trust or will can decrease your loved one’s mental and emotional burden, giving them more time and space to grieve. They clarify your wishes and can make taking care of final affairs less stressful.
Learn how to compare a trust vs. will to begin estate planning today.
Comparing Trusts And Wills
Trusts and wills are both legal estate planning documents that ensure your assets are transferred appropriately. However, each has unique benefits and considerations, and sometimes there are perks to having both documents.
|Estate planning with dependents and end-of-life wishes.
|Living asset transfers, financial planning, and tax benefits.
|Guardians For Minor Dependents
|Yes for irrevocable trusts
There’s a lot to understand about trusts and wills before deciding which is right for you. Dig into the details below.
Wills are legal documents that initiate the legal transfer of assets from the deceased to the will’s beneficiaries. They provide direction for several after-death wishes, including naming an executor, guardianship for underage dependents, and even funeral arrangements.
Wills are ideal for families considering dependent care and financial security since they dictate asset transfers and guardianship. Once an individual starts a family or begins to collect assets like real estate, they should consider a will.
When assets are transferred, the government may collect an estate tax, and creditors have priority access to the estate.
The legal terminology associated with wills can be unfamiliar, so here are some common terms defined:
- Testator: The person writing the will to express their own wishes after passing away.
- Estate: Everything that belongs solely to the individual writing the will. Jointly owned assets generally fall outside the bounds of an individual’s will.
- Executor: The person chosen by the will writer to ensure lingering debts and bills are paid and the wishes expressed in the will are fulfilled.
- Witnesses: Individuals who sign the will and make more traditional wills legally binding. Some wills don’t require witnesses.
- Letter of instruction: This document accompanies a will to indicate who will receive which family memorabilia items, like photos or letters.
- Probate: The process through which the estate is divided and the wishes of the will be fulfilled.
Types of wills
There are several different kinds of wills, but not all wills are recognized in every state. Before selecting what kind of will to write, understand the laws in your state.
A few common kinds of wills include the following:
- Simple will: This kind of will is best for people who don’t have a complex estate.
- Living will: This kind of will states a person’s wishes regarding medical treatment. It’s helpful in situations when someone can’t make those decisions for themselves, like if the person is in a coma.
- Deathbed will: This will detail final wishes given shortly before dying. These are often contested because they are not as well documented as other types of wills.
Trusts are an alternative to wills that go into effect immediately after signing. They ensure that most of the assets go directly to the beneficiaries because they protect assets from creditors, bypass some taxes, and don’t go through the same transfer process that assets tied to wills do.
Trusts have different terminology than wills:
- Trustor: The person who creates the trust, similar to the testator of a will
- Trustee: The person who manages the trust, similar to the executor in a will
These documents are best for complicated estates and grantors that want to transfer assets while living. They may provide a number of tax benefits, so they’re also good financial planning tools.
Like wills, trusts can be created jointly by couples or created independently. They also detail asset transfers to beneficiaries like wills, but they also consider:
- Particular circumstances as defined by the type of trust
- Guidance while an individual is alive but incapacitated
Revocable trusts are flexible documents that a trustor can amend or terminate at any time. The trustor retains ownership of their assets with full control while alive, so they’re also responsible for estate taxes.
These trusts are great because they can be easily amended, and administration is a smooth process. They’re also ideal for individuals with real estate investment properties across several states.
There are some considerations before signing a revocable trust. The biggest is that they’re time intensive to implement, and grantors don’t receive any tax advantages. Creditors can also access assets in a revocable trust as long as the trustor is living.
Irrevocable trusts aren’t amendable or revocable, which is a key difference from revocable trusts. The grantor releases ownership once the trust is established, so they can’t control the trust assets unless they retain an interest that grants access under predetermined circumstances. and aren’t responsible for the taxable income or assets included.
A third-party trustee manages the trust since the grantor releases control. The grantor isn’t responsible for the taxable income or assets managed by the trust, and the assets are also protected from creditors since the trust can’t be altered.
Of course, there are a few types of irrevocable trusts available to accommodate unique needs and circumstances.
Special purpose trusts
Purpose trusts address specific needs in estate planning, like naming charity or business beneficiaries or making considerations for a particular family situation. These special purpose trusts include charitable trusts and supplemental needs trusts.
Trusts can name charities as beneficiaries instead of individuals and receive special tax benefits. Grantors can choose between a charitable lead trust or a charitable remainder trust, depending on their beneficiaries and estate goals.
Charitable lead trusts (CLT) provide regular payments to named charities for a designated term. Once the contribution period ends, the remaining assets are split among the remaining beneficiaries.
Grantors can choose if their CLT is taxed as a grantor or nongrantor trust. Grantor trusts provide income tax deductions for the current value of future charitable payments to the grantor.
Nongrantor trusts provide gift and estate tax benefits, though the grantor won’t receive an immediate deduction.
Charitable remainder trusts (CRTs) pay out in the opposite sequence and prioritize noncharitable beneficiaries. Individual beneficiaries receive regular income for a set term before the remaining assets are distributed to designated charities. Grantors can even name themselves as a beneficiary to receive regular income for retirement or other goals.
Beneficiary terms can’t exceed 20 set years, though they can be established with a life term for the remainder of the grantor’s years.
Any payments beneficiaries receive is subject to income tax. Grantors can take a partial charitable deduction based on the estimated donation expected at the end of the payment term.
Supplemental needs trusts
These trusts address the needs of individuals with disabilities without impacting federal and state assistance benefits. This means individuals receiving assistance like Social Security income (SSI) will continue to receive government support while also receiving income via the trust.
Trusts can be first-party (funded by the individual’s wealth and assets) or third-party (funded by multiple sources, like inheritance, gifts, etc.). There are a number of ways to fund a supplemental needs trust, and it’s always wise to consult financial and estate planning experts to navigate this complex legal trust.
Can You Have Both?
Individuals can benefit from both a will and a trust for their estate planning. Wills are ideal for establishing inheritances and after-death wishes, while trusts have several financial and tax advantages beyond managing estate assets.
There are also a few documents you can use to better integrate your will and trust.
A pour-over will transfers your estate assets into an existing living trust to ensure all assets are accounted for.
A testamentary trust is established after death considering terms defined by an existing will, like a college trust for minor children once they turn 18.
How To Establish A Will Or Trust
Lawyers traditionally help people prepare their wills and trusts. Though, with the advent of the internet and online legal services software, making a legally binding will or trust has gotten cheaper and easier.
Working with a lawyer can be more expensive, but some benefits. Lawyers can ask questions to better understand an individual’s wants and help them think through different scenarios. Lawyers are also better equipped to handle complex wills or trusts and large estates.
Wills created online are a relatively new trend. These wills are much cheaper than paying a lawyer’s fee and very easy to create.
Online legal services have legal documents available. Some have software designed to help customers fill out the forms. Some online legal services file the documents on their customers’ behalf, while others do not.
There is plenty of debate about electronic wills because they are relatively new and can’t always be verified in the same ways wills traditionally have been.
However you choose to prepare your will or trust, you’ll want to begin considering these items ahead of time:
- Executor or trustee
- Guardian nomination for dependents and pets
- Asset distribution
It’s a good idea to have a conversation with your executor or trustee about the responsibility. While you chat, assess their comfort level and willingness to ensure that your estate is taken care of properly.
Finalize Your Estate Planning
Proper estate planning ensures that your assets and loved ones are cared for after death while considering inheritance for beneficiaries and final expenses.
Understand the differences between trusts and wills to determine which is right for you, and consult a professional when you’re ready to establish these important legal documents for your final wishes.