You’ve likely accumulated assets throughout your life, whether you own a home, bought a car, or built savings. Maybe you also have minor children. Estate planning involves deciding what happens to these assets and loved ones after you’re gone.
As part of this process, you may create a will and trust. A will outlines how your assets get distributed after you pass, while a trust holds and manages your assets according to your instructions.
So, when should you use a will vs. trust? Can you have both? Here’s what you need to know.
What Is a Will?
A will is a legal document that acts as your voice after you’re gone. It states how you want your assets, such as your home, investments, and financial accounts, to be distributed among your chosen beneficiaries.
In your will, you can also name an executor, the person responsible for carrying out your wishes and managing the distribution process. If you have minor children, you can designate a guardian to care for them until they come of age.
Who Is a Will Good For?
A will works for many people. You don’t need to be wealthy to draw up a will. In fact, wills are often beneficial if you have a simple estate and straightforward wishes for distributing your assets.
What a Will Can (and Can’t) Do
A will is a versatile tool, but it has limitations.
A Will Can:
- Distribute your assets
- Name an executor
- Appoint guardians
- Make specific bequests
- Forgive debts
A Will Can’t:
- Avoid probate
- Manage assets during incapacity
- Protect assets from creditors
When Does a Will Take Effect?
A will takes effect after your passing. Upon your death, your will enters probate—a court-supervised process to validate the will’s authenticity, ensure debts and taxes are paid, and distribute assets to your beneficiaries.
What Are the Tax Implications of a Will?
Your assets may be subject to estate taxes depending on their value. Estate taxes are calculated based on your estate’s total worth at the time of your death. Estate tax laws vary, so consult a financial professional to understand how these taxes may impact your estate.
What Is a Trust?
A trust is a legal entity created to hold and manage assets on your behalf. A trust provides a level of control and flexibility that a will alone may not offer.
As the trust’s creator, you’re known as the grantor. You transfer assets into the trust, where a trustee manages it according to your instructions. You can designate the trustee. These instructions are laid out in a trust document, a legally binding agreement that guides how the assets are managed and distributed.
Types of Trusts
Trusts are either revocable or irrevocable. Understanding the difference can help you tailor your estate plan to your needs and goals.
Revocable Trusts
Revocable trusts offer flexibility and control. As the grantor, you can modify or even dissolve a revocable trust during your lifetime. This type of trust is often used to manage assets during incapacity and avoid probate after death.
Irrevocable Trusts
Irrevocable trusts are more permanent and typically used for specific purposes like tax planning or asset protection. Once established, you can’t easily change or cancel an irrevocable trust. While you give up control over the assets in this trust, it can provide tax advantages and safeguard your wealth from potential creditors.
Who Is a Trust Good For?
A trust can work well for many people. It can be a particularly good option if you have complex assets, a high net worth, or a beneficiary with special needs. It’s also a good way to avoid probate.
What a Trust Can (and Can’t) Do
A trust typically has a broader range of offerings than a will but has limitations.
A Trust Can:
- Avoid probate
- Manage assets during incapacity
- Provide for special needs
- Offer tax benefits
A Trust Can’t:
- Replace a will entirely
- Guarantee tax avoidance
- Fully protect assets from creditors
When Does a Trust Take Effect?
When a trust takes effect depends on its type: living or testamentary. A living trust is active as soon as it’s created and funded. A testamentary trust is created within your will and only takes effect after your death.
What Are the Tax Implications of a Trust?
Trusts have complex tax implications that vary based on the type and your situation. Consult with a tax professional to understand the right tax strategies for you.
Can You Have a Will and a Trust?
You can have both a will and a trust to create a more comprehensive estate plan.
Your will can include a provision called a pour-over will. It directs any assets you didn’t include in your trust to transfer to the trust upon your death. This strategy ensures all your assets are managed and distributed according to your wishes. Meanwhile, your trust can handle most of your assets, ensuring they avoid probate, are managed during incapacity, and are distributed to your beneficiaries according to your instructions.
Combining a will and a trust can offer a powerful estate planning duo. The will acts as a safety net, while the trust provides a secure and efficient way to manage and distribute most of your assets.
Factors to Weigh When Considering a Will vs. Trust
Choosing between a will, trust, or combination is a personal decision that depends on your circumstances and goals. To help you make an informed choice, consider these key factors:
- Your estate’s size and complexity
- Whether you desire privacy from the probate process
- Any concerns about family dynamics
- Tax implications
- Your age and health
- The cost of creating and maintaining a will or trust (or both)
Making an Informed Choice for the Future
Wills and trusts are valuable tools for leaving a legacy and protecting your final wishes. Depending on your needs and goals, each offers distinct advantages. Understanding the nuances of wills vs. trusts can help you make better-informed decisions for your and your family’s future.
Estate planning isn’t always easy, but it can help protect your assets for the long term. Bankers Life is here to help you along the way. Contact a Bankers Life representative for individualized support and guidance.
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