Though they are often mistaken for one another, a will and a trust are very different legal documents. Both are legal instruments that ensure any assets passed down to heirs and beneficiaries are in accordance with your wishes. While each is considered a pillar of estate planning, there are several disparities to consider, such as when they go into effect and how much, if any, can be contested.
Depending on individual circumstances, one may be better than the other, although some individuals choose to use both to achieve their desired outcomes.
This is where our extensive experience in estate planning in Bountiful, UT, can be of assistance. They can provide you with advisory services and financial planning advice to ensure you have a comprehensive estate plan in place for your family.
What is a Will?
A will is a legal document that designates how your assets will be managed upon your death. These duties include legal guardianship of children and pets, distributing assets and properties to family members, carrying out funeral arrangements, and more.
Although most states have their own guidelines, most require a written will to be signed or executed by the testator and two witnesses to consider the document legally binding.
What is a Trust?
The creation of a trust forms a separate legal entity, and the creator of the trust, the grantor, can hold assets either for their benefit, their beneficiary designations, or a third party. A successor to the grantor can be chosen to manage the trust if they die or are considered unable to manage the trust.
Designating guardianship for minors cannot be done in a trust and must be done in a will, which is why many people use both wills and trusts concurrently. They can ensure that your investment accounts and life insurance contracts are included within the trust as outlined by your estate plan.
Key Differences Between a Will and Trust
The Effective Date
While a living trust is active upon its creation and subsequent funding, a will does not go into effect until after you die. Because of this distinction, a trust protects your assets and directs them in the event you become mentally incapacitated, while a will cannot.
The Probate Process
Regardless of whether you die with a will or without one, your estate will go through the probate process. A probate court must confirm that your will is valid before allowing the executor to distribute its assets per the instructions.
In several states, the probate process can be a lengthy process with added costs. The absence of a will adds more time and complexity to the process. All states require probated wills to become public record, allowing the will’s details to become accessible to the public.
A living trust provides more privacy and allows you to avoid the probate process. Bypassing the probate process provides a smoother transition of assets, reduced expenses, and more time to focus on other aspects of the estate, like tax planning. A vital aspect of estate planning includes finding a resourceful financial planner to help make the process easier.
Cost and Complexities
Trusts tend to have more upfront costs than wills since they are often more complex and comprised of more paperwork.
To work properly, a living trust needs to be funded, meaning that all of the assets housed in the trust must be titled appropriately to be in the name of the trust. Either an estate planner or your designated financial planner for estate planning will provide directions on how to fund the trust and name your beneficiaries appropriately.
Dealing with the assets in a trust can be complex, particularly if you want to refinance a property held inside a trust. While some lenders may simply review the agreement, many require the property to be removed from the trust while it is being refinanced.
Although both wills and trusts are legal documents designed to help manage your estate and are considered pillars of an estate plan, they abide by different laws. Trusts are under the jurisdiction of contract law, while wills fall under testamentary law. Since contract law abides by stricter standards than testamentary law, a living trust generally supplants a will.
Living trusts commonly take precedence over wills due to their continuous nature; living trusts are effective once they are signed and funded and allow for updates, whereas a will goes into effect upon death and is formed only at a single point in time.
Though creditors can make claims against both wills and trusts, it is harder to do against a living trust than a will.
Tax planning is imperative in estate planning for any high-net-worth individual, particularly in the estate tax for both wills and living trusts. The 2022 federal estate tax exemption is $12.06 million, or $24.12 million for married couples. Any assets above this are subject to federal estate taxes, which can reach up to 40%, depending on the amount, and does not include any state estate taxes.
Since estate tax exemption changes over time, anyone concerned about future changes can use an irrevocable trust, which extirpates assets from the estate, reducing future tax burdens.
Your retirement planning efforts should include a strategy that limits your tax liabilities whenever possible.
Who Needs a Will?
Estate planning can be a complex and lengthy process. Understanding the disparities between the different estate planning tools helps make a more fitting decision. Generally speaking, most people are going to need a will, although trusts are only suitable for individuals and families who have accumulated real property, investments, and other assets of value.
Consulting with an estate planning attorney- who often gets input from a tax advisor or financial advisor in Bountiful, Utah can help provide a second opinion on reaching your estate and tax planning goals.
What Happens if You Die Without a Will?
Dying intestate, or without a will, can result in your assets not being distributed as you would prefer. Joint bank accounts with a spouse or named beneficiary will typically transfer, as well as any real estate owned in joint tenancy. However, real estate arrangements with a co-ownership will not.
Intestate state law regarding succession will vary, though most will automatically transfer assets to the surviving spouse or children. However, there is always a chance of delay, especially in probate.
When an individual passes away without a will, a court must interpret what they would have wanted, and since no one has been appointed, the court must also approve whoever steps up to do so. Problems will undoubtedly arise if more than one person steps up or if there is any dispute regarding the beneficiaries, which adds to the process.
Choosing What’s Right For You
Now that you know the difference between a will and trust, you can decide what is best for your estate. If you have any questions or need help getting started,with your estate plan, please contact us. As a financial advisor in Bountiful, UT, we bring a wealth of experience and expertise from financial planning to estate planning. Our team of advisors and portfolio managers would be happy to assist you in creating an estate plan that meets your unique needs and protects your assets.