Everyone has an estate that will continue to exist after you die. Thus, it is vital that you begin to consider which estate planning tools you will use to designate who will benefit from your assets, how certain items will be distributed, and when such distribution should occur.
The need to plan your finances and estate is especially magnified if you have minor children. Without a proper plan in place, you would leave the courts with the responsibility of determining the welfare of your children.
But knowing that estate planning is important will only take you so far.
Although most people tend to draw up either a will or trust to facilitate their estate planning needs, the specific estate-planning tool relied upon tends to vary based on personal preferences.
This article explains the difference between a will and a trust, so that you can decide what might work best for you, your needs, and that of your heirs.
What is a will?
A will is a document that establishes how you would like your assets to be distributed after you pass away. It also provides you with the opportunity to name an individual as your personal representative or executor to carry out those desired distributions and ensure that any outstanding financial liabilities are accounted for.
To be implemented, a will would need to be properly executed with the proper signing formalities for admission to probate court. In court, the judge will determine whether the will is legal and valid before any distributions are facilitated.
Without a will, however, probate proceedings can be lengthy and complicated. This would occur if you were to die without a will, which legally, is considered “dying intestate.”
If you were to pass away without an estate plan, any assets owned by yourself and without a beneficiary designation would be distributed and managed according to your state’s intestacy laws through a probate proceeding.
In Florida, for example, a surviving spouse may or may not be entitled to the entire intestate estate if there are surviving children of the decedent. This means that your spouse may only receive a fraction of your estate, which may not be what you hope to occur.
To avoid having such important decisions made without your input, it is vital to create a will that honors the decisions you would like to be made after you pass away or lack the capacity to manage your affairs.
What is a trust?
A trust is a legal entity that protects the assets in your estate. Specifically, the legal arrangement ensures that a transfer of assets occurs from the owner, known as a grantor or settlor, to a trustee. The trustee is responsible for the management and disbursement of assets to the designated beneficiaries in accordance with the terms laid out in the trust document.
Most relevant to estate planning purposes, irrevocable trusts become effective once assets are transferred to them. In this way, the trust cannot be reversed. As a result, once assets are put into the trust, the trust essentially becomes the legal owner of the assets. This is an important distinction from wills where distribution and implementation would occur after your death.
Trusts can also be used in conjunction with wills. For example, an individual may indicate in a will for a testamentary trust to be created after death.
Regardless, a trust is a great option for those who are looking to manage their financial affairs in private. This is because a trust can help establish the management and distribution of assets without involving probate court.
For many people, however, the main reason for creating a trust is because of the associated tax advantages. Irrevocable trusts, for example, allow certain amounts to be contributed annually without being subject to gift taxes. These assets also tend to be protected from estate taxes.
It is vital that you create an estate plan sooner rather than later in life. Oftentimes, estate planning involves drafting a will that would be enforced after you pass or establishing a trust that becomes effective upon creation. Because there are advantages and disadvantages to both a will and a trust, it is important that you consult proper legal counsel and experts about your estate planning needs.
Our experienced estate attorneys at Mendez and Mendez Law are eager to discuss your situation and work with you to best serve your estate-planning needs.