When planning for the future, it is important to know the difference between a will and a trust.
Both tools help manage assets and ensure they go to the right people, but they work in different ways and have unique features.
What is a will?
According to CNBC, 67% of Americans do not have an estate plan. A will is a legal document that explains a person’s preferred distribution of their assets after they die. The person creating the will, known as the testator, can specify who will receive their property, money and personal belongings. A will also allows the testator to name a guardian for their minor children and an executor to carry out their wishes.
A will goes into effect only after the testator’s death. The executor then takes the will to probate court, where a judge oversees the distribution of the estate. This process can take several months to complete and may involve court fees. However, a will is relatively easy to create and the testator can make changes at any time before their death.
A will goes into effect only after the testator’s death. The executor then takes the will to probate court, where a judge oversees the distribution of the estate. This process can take several months to complete and may involve court fees. However, a will is relatively easy to create and can be changed at any time before the testator’s death.
What is a trust?
A trust is a legal arrangement where a person, called the grantor, places assets into a trust for the benefit of others, known as beneficiaries. A trustee, who can be an individual or an institution, manages the trust according to the grantor’s instructions. Trusts come in two main types: revocable and irrevocable.
A revocable trust, also known as a living trust, allows the grantor to make changes or even dissolve the trust during their lifetime. This type of trust helps avoid probate, as assets transfer directly to the beneficiaries upon the grantor’s death. This can save time and money, and it provides more privacy since it avoids probate in which records are public.
Once the grantor has established an irrevocable trust, they cannot make changes or revoke the trust. This type of trust offers certain tax benefits and can protect assets from creditors, but it requires giving up control of the assets placed into the trust.
Wills and trusts have their pros and cons. Understanding the differences will help you choose the right one for your situation.
