What is the difference between trusts and wills?
A will is a legal document or instrument containing instructions as to how a person, the testator, wants his or her estate to be managed and distributed after their death. Previously, separate instruments were used to disburse personal property (testament) and real property (will). Now, a will, sometimes called a “last will and testament”, disposes of both personal and real property.
A person who dies without a will is referred to as intestate, which results in that person’s estate being distributed according to the laws of the state in which the person resides. On the other hand, a will enables a person to choose her heirs rather than defaulting to the state laws of descent and distribution which selects the heirs for her and, despite being blood relatives, may be individuals the testator dislikes or isn’t acquainted with. Furthermore, the testator decides who will best administer her estate to her heirs, rather than allowing a court to appoint a stranger to serve as executor. Perhaps most importantly, a will can designate a guardian, someone who will raise the young children of the testator i n the event of his death and there being no other parent.
A trust can accomplish what a will does, but has additional benefits. Like a will, a trust contains written instructions directing the disposition of a person’s (trustor) assets. However, a trust takes effect at the time it is executed and may make distributions while the trustor is alive, sometimes called a “living trust.” This is different from a testamentary trust which is created by the terms of a will and places some assets from the deceased person’s estate in a trust to exist from the date of death and until fully distributed. These are often used for the purpose of managing distributions to young children until they are sufficiently mature to receive their full inheritance.
A trust can, like a will, designate a guardian for the young children if the trustor dies and there is no other parent. A trust is managed by a trustee, or trustees, who acting under one of the separated bundles of ownership (legal ownership), can sign documents, make purchases and investments, pay bills, and many other functions of an owner of property. The primary difference being that the trustee has a fiduciary duty to act in the best interest of the beneficiaries who are the equitable owners as opposed to legal ownership which is held by the trustee. Interestingly, this separation of ownership is often one in the same in the sense that the trustor often designates himself to be the trustee and lifetime beneficiary, and naming other contingent beneficiaries.
In order for a trust to function properly after being properly executed, the assets must be legally transferred to the trustee. Trusts can take advantage of certain IRS tax generation skipping codes and therefore, pass more assets to the heirs instead of paying more taxes. But there must be a significant amount of assets to surpass the standard exemptions.
Do I need a trust? I have been told trusts are better than Wills.
As previously mentioned, a trust can provide additional benefits but also come with a cost. They require careful attention to transfer each asset to the trustee. They are typically more expensive than a will. Trusts are far more valuable than these relatively minor inconveniences depending on what purposes you are trying to accomplish. Trusts can provide Common Questions a better mechanism and instructions to take care of minor children. Trusts provide tax savings, but only over the threshold standard exemptions, which are several millions of dollars. Trusts can protect those assets from creditors, if they meet certain requirements. Finally, trusts avoid the hassle of probate, or the court managing the execution of the will.
Wouldn’t a revocable trust protect my assets from creditors?
If the ownership can be bundled back up, meaning that all of the separate parts of the ownership, are still controlled by the trustor, or if she has the power to “rebundle” it back to herself, then the assets may not be protected from creditors.
Wouldn’t a revocable trust avoid (or at least reduce) taxes?
If the standard exemptions—which change yearly—are not exceeded, then the trust doesn’t provide the added protection or benefit. However, if the marital assets exceed the standard exemption and are properly divided into two separate trusts, often called a marital trust and a family trust, then they can gain additional tax exemptions, depending on the total amount of assets.