Estate planning is an important part of financial planning that many people overlook until it’s needed. Two of the most common estate planning tools are known as wills and trusts and they allow you to control how your assets are distributed upon your passing. Although these two words are often used interchangeably, they actually refer to two very different documents. By understanding the difference between a will and a trust, you can make the best decision for your financial situation and provide reassurance for your loved ones.
Understanding Wills
Wills are legal documents that outline your wishes for how you want your estate to be divided after you pass away. Your estate includes a list of assets, investments, and property. This form of documentation is crucial for ensuring that your assets and possessions go to the right people. There are various types of wills that can fit your preferred situation. The 4 most common are:
- Simple: A simple will is the most basic type of will, outlining your wishes for asset distribution and appointing an executor. It is suitable for individuals with straightforward estates and minimal assets.
- Testamentary Trust: This type of will allows you to create a trust that will be established upon your passing. It can be used to provide for minors, individuals with special needs, or to protect assets from potential creditors.
- Joint: A joint will is created by a couple, typically spouses, and outlines their shared wishes for asset distribution. It is commonly used when individuals have similar estate planning goals.
- Living: Unlike the other will options mentioned, a living will does not deal with asset distribution. Instead, it outlines your healthcare preferences and instructions for end-of-life medical decisions.
When creating a will, you will need to appoint an executor, who will be responsible for carrying out your wishes and distributing your assets. You’ll also want to name guardians for your children who are minors, specify funeral arrangements, and even leave instructions for the care of pets. It's important to update your will regularly to reflect any changes in your life, such as marriages, divorces, births, or deaths.
Understanding Trusts
Trusts, on the other hand, are a bit more complex than wills. They are legal arrangements that allow a third party, known as a trustee, to hold and manage assets on behalf of a beneficiary or beneficiaries. The trustee is responsible for following the instructions outlined in the trust document and ensuring that the assets are distributed to the beneficiaries according to your wishes. Trusts can be useful for various purposes, such as:
- Providing for minors or individuals with special needs
- Protecting assets from creditors
- Minimizing estate taxes
There are many different types of trusts, but a key differentiating factor is whether they are revocable or irrevocable. Revocable trusts, also called living trusts, allow you to make changes to the trust during your lifetime. You, as the grantor, can name yourself a trustee to retain ownership and control over the trust up until your death. Irrevocable trusts, on the other hand, transfer your assets out of your estate and cannot be changed once they are established.
Key Differences
The main differences between wills and trusts lie in how they are structured and when they take effect. Each has their own advantages and considerations, including:
The complexity of your estate: If you have a straightforward estate with few assets and beneficiaries, a will may be sufficient. However, if you have substantial assets, multiple beneficiaries, or specific wishes for how your assets should be managed, a trust can provide more flexibility and control.
The desire for the arrangement to take effect in your lifetime: A characteristic of a trust is that it can take effect while you are still alive, and it can also bypass probate, providing for a quicker distribution of assets. Trusts offer more control over your assets and can be used to protect your assets from creditors and minimize estate taxes.
How you feel about privacy: Another factor to consider is privacy. Wills are public records and can be accessed by anyone, while trusts offer more privacy and confidentiality. If you prefer to keep your estate plans private, a trust may be the better option.
Common Misconceptions
As with any legal topic, there are often common questions and misconceptions surrounding wills and trusts. One common question is whether you need both a will and a trust. The answer depends on your individual circumstances and goals. While a will is necessary for most people to ensure their assets are distributed according to their wishes after they pass, a trust can provide additional benefits. Another misconception is that trusts are only for the wealthy. In reality, trusts can be beneficial for people of all income levels, as they provide more control over the distribution of assets and can protect beneficiaries with special needs.
Take Control of Your Legacy
It's never too early to consider your legacy. No matter your net worth, the surest way to provide for the financial and emotional well-being of your heirs and beneficiaries is through proper estate planning. Figuring out where to start can be overwhelming, but our advisors can help make the process more manageable! An estate planning attorney or financial advisor will help you navigate the complexities of wills and trusts and ensure that your wishes are properly documented and legally binding. They can also provide valuable insight and advice on tax planning, asset protection, and other estate planning strategies.
Contact an Advisor at Lakeland Financial Services or download our free Estate Planning Guide today and take control of your legacy.
Related Articles & Resources:
Tips for Writing or Updating a Will in New Jersey
How to Choose an Executor for Your Estate in New Jersey
The Key Estate Planning Documents You Need
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