Defining a Will:
A will, also known as the last testament, is a legal document that enforces how a person’s assets will be allocated after their death. A will serves more functions than just distributing the assets of a deceased person. In fact, a will is a crucial component of estate planning.
The will ensures that a person’s desires for their assets are carried out. Without a will, the allocation of assets will be left to the government and the government might retain the properties instead of heirs.
Defining a Trust:
A trust is a relationship between two parties where one party (the trustor) gives the right to manage assets to another party (the trustee). The trust is set up with the objective of benefiting a third party (the beneficiary). Trusts are also important in estate planning and can be used to minimize estate taxes.
There are several kinds of trusts, these include:
Key Differences Between Wills and Trusts
Although wills and trusts have many similarities, there are several key distinct differences between the two legal structures. The differences include:
Time of commencement: A will goes into effect after the death of a testator (the person who made the will). In contrast, a trust goes into effect immediately after it is signed and has assets. A trust is a legal structure you can utilize to distribute assets during your lifetime and after death.
Appointing guardians: A key difference between wills and trusts is that wills allow you to appoint guardians to children while trusts cannot. This is an extremely vital distinction because if you do not appoint a guardian to children, a judge may appoint one for you. A will also ensures that your funds are directed to your children’s’ livelihoods, so they don’t become a burden on the guardian.
Probate: Probate is the legal process that occurs after someone dies. It includes distributing assets, paying debts, and more. This process takes time and is generally costly to beneficiaries without providing much value. Probate will always occur if a person has a will. A trust is a way to avoid the probate process while ensuring the distribution of assets stays private for a family.
There are several misconceptions that people have about wills and trusts. Some of the most common misconceptions include:
Wills and assets are private: Although some assets don’t need to go through probation, the vast majority will. If you are named in someone’s will, you have to go through the probation process for your state, and the will and named assets will all be public record.
You can avoid taxes with wills and trusts: Although some trusts have structures that can minimize taxes like estate taxes, having a simple will or trust is not a way to legally avoid paying taxes. Make sure you sit down with a legal professional to avoid making crucial tax issues.
Wills prevent arguments over assets: Wills are some of the most contested legal documents in the United States. A will is not law; unhappy family members and friends of the deceased may contest assets with the individuals named in the will.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.