Whether you’ve just started to think about estate planning or want to ensure that your wealth management issues are under control, trusts and wills are two terms that you will encounter time and time again.
While many people use the two terms interchangeably, trusts and wills are two very different aspects of estate planning. With the help of a professional estate planner, you will soon understand the two documents and their functions.
What is a Will?
A will is an estate planning document that is designed to be used following your death. Its purpose is to determine how your financial commitments will be fulfilled and remaining assets will be distributed.
While there are four main types of wills, simple wills are the most common by far. The legally enforceable documents set out to;
- Elect an executor (a person who controls the estate and ensures that assets are distributed as you wish).
- Name the beneficiaries who you intend to distribute assets too, as well as guardians for minors.
- Include plans to help surviving loved ones benefit from reduced inheritance tax, which is why a estate planner is invaluable.
- Put plans in place for who would look after your children and/or other dependents following your death.
It’s important to have a will because, without one, your death would be labeled as intestate (1). In this case, your estate would be distributed as per intestate regulations, which can see assets go to the wrong people and open the door to disagreements.
Wills are formal and legal document that involves the testator (you), the executor (person who will take charge following your death), and the beneficiaries (people who receive something, and their guardians). To become legally binding, there also needs to be witnesses (usually two).
A estate planner will guide you through the process to ensure that all financial matters are taken into account. Only assets held solely by you may be included.
What is a Trust?
Trusts are another type of legal agreement where the grantor(you) can hold assets for yourself or a third party (2). Essentially, assets are transferred to the trust, where they can be held during your lifetime and after your death.
As with wills, you can name a person or persons to manage the trust should you die or become incapacitated – but they are known as the successor trustee. The successor trustee can oversee the trust to take care of the assets on behalf of the beneficiaries.
A estate planner can help you establish various types of trusts, including a living trust or a testamentary trust. Grantors have greater control over assets as they can stipulate the conditions for when inheritance is distributed. For example, inheritance for their children may be released in stages as they get older.
Meanwhile irrevocable trusts and charitable trusts can remove specified assets from the estate.
Which is right for you?
Both wills and trusts are important documents within the content of effective estate planning. They can coexist, although trusts will take priority following your death. However, only 46% of executors (3) are aware of the deceased’s estate planning documents. So, you must create a clear dialogue with them whichever route you take.
Trusts are more complex, both in their establishment and subsequent management. Naturally, this does mean that they are more expensive too. However, they do provide added privacy to your estate as wills and intestate situations will go through probate processes.
It should also be noted that trusts come into effect from the date they are signed. In contrast, wills (excluding living wills) will only come into effect after your death. If you want to put guardianships in place for minors, though, wills are the right choice.
Ultimately, there is no single right or wrong solution other than the one that reflects your circumstances.
Family.Estate can match you with a qualified estate planner in your area who will help you consider the pros and cons of each. Take the first step to effective estate planning by taking our quiz today.