How Trusts and Wills Differ in Managing Your Assets

Trusts and Wills are two different ways to say who will receive your assets. Trusts can be more complex and expensive, but they minimize or avoid probate and provide privacy and asset management benefits.

A Will names beneficiaries appoints an executor, and states your final wishes. A Trust does the same but also plans for your incapacity while living.

Asset Management

A will is a legal document that states who you want to receive your property upon your death, defines your final wishes, and nominates a guardian for your minor children. A trust is a more comprehensive tool that allows you to avoid family disputes, settle your estate more quickly, provide protection from creditors or financial predators, and provide confidentiality for trust assets.

Now what’s the difference between a trust and a will? The most significant difference between a Will and a Trust is that a Will only takes effect after your death, while a trust can be implemented as soon as you sign it. A Will also typically requires assets to go through probate, which can be long and expensive. However, a Trust can avoid probate altogether, which may help save your loved ones time and money.

In addition, a Will typically only names beneficiaries for IRAs, life insurance policies, and other retirement accounts. At the same time, a Trust can allow you to serve as trustee during your lifetime, preventing the need for a court-appointed conservator or guardian if you become incapacitated. A Trust also typically offers more control over how assets are distributed, including the ability to give gifts while avoiding taxes and managing tax-deferred growth.

Trusts come in four primary categories: revocable living trusts, irrevocable trusts, testamentary trusts, and inter vivos trusts. Revocable living trusts are established and funded during an individual’s or couple’s lifetime and are often used to manage assets while avoiding probate.

Incapacity Planning

Whether or not you become incapacitated, your family may struggle to deal with significant financial and legal matters if proper documents are not in place. Incapacity planning involves creating documents that allow you to appoint someone to act on your behalf when making decisions during a period of incapacity. This is important to estate planning, as it can alleviate many concerns for loved ones after death.

The most common forms of incapacity, power of attorney, healthcare proxy, and living will, are all examples of planning. Generally, these allow someone else to conduct financial transactions and enter into agreements on your behalf.

If you do not have a medical plan, a court-appointed guardian or conservator could control your property and assets after your incapacity. However, suppose you have trust in business. In that case, the backup trustee you choose to manage your assets in your faith will take over after your incapacity, eliminating the need for a conservator or guardian.

You can also convey your wishes for end-of-life care in a living will or advance directive, including a do not resuscitate (DNR) order. This informs emergency providers and other loved ones of your preference to avoid extreme measures to keep you alive when they would only have a poor quality of life.

Asset Protection

Unlike a will, which only takes effect after death, a trust can be set up while you are alive. A trustee will oversee the resources in the faith based on your instructions during your lifetime and after your death, distributing distributions to beneficiaries by your wishes. A trust can also help you avoid probate, which can be time-consuming and expensive.

The critical difference between a will and a trust is that a will must go through the probate court process to validate the will, appoint a representative, inventory property, pay debts and expenses, identify heirs, and oversee the distribution of estate property. A trust bypasses probate and, if revocable, can be updated throughout your lifetime. A will can also require a court-appointed guardian or conservator for you in the event of incapacity. At the same time, a trust typically has backup trustees designated to manage your assets.

A trust can protect your estate from creditors, lawsuits, and taxes while preserving the value of your hard-earned wealth for generations to come. The type of asset protection you need will depend on your unique circumstances and goals. Still, it can include strategies such as setting up a family limited partnership or a limited liability company to manage and hold the underlying assets efficiently and limit the ability for others to access the purchases without your permission.

Taxes

As you can see, there are many benefits to choosing a trust over a will. But which one makes sense for your estate plan? That choice should be based on the value of your assets, the age and capabilities of your beneficiaries, tax planning considerations, and privacy concerns. A trusted advisor can help you weigh these factors.

While a will typically only occurs after death, a trust takes effect as soon as it’s created and funded. If you become incapacitated, the backup trustee in your faith can manage your affairs. This avoids needing a court-appointed guardian or conservator, which may be more expensive and less effective.

Another benefit of a trust is that it offers more control over how your assets are distributed to your beneficiaries after your death. For example, you can stagger your trust distributions so that recipients receive their inheritance in smaller amounts over some time. This can be helpful if you have beneficiaries who cannot manage large sums of money wisely.

It is important to remember that both a will and a trust can be used together, but each must address different issues. For instance, a will might be the most cost-effective option if you have a small estate with easily transferred assets and simple bequests.