When it comes to estate planning, both wills and trusts are legal documents used to manage your assets. However, they are created under different laws. Trusts are subject to contract law, while wills are subject to probate law. Contract law is governed by a stricter standard than testamentary law, meaning that a living trust generally replaces a will.
Trusts are frequently used in estate planning for their ability to facilitate the transfer of assets to heirs without the cost and publicity of the estate. Living trusts created during the life of the grantor allow for faster and more efficient transfers than wills. These fiduciary transfers also allow grantors to maintain privacy with respect to the nature and value of their assets. Trusts can be used to maintain the confidentiality of different values of assets transferred to different heirs, as well as to ensure the privacy of family businesses and real estate held through entities not publicly identified with their owners. A big difference between the two is in how and when they come into effect. Wills don't take effect until you die, while a trust comes into effect immediately after you sign and fund it.
A living trust is more expensive to establish than a typical will because it must be actively managed after its creation. The main function of wills and trusts is to name the beneficiaries of your property. In a will, you simply describe the property and list who should get it. When using a trust, you must do so and also transfer ownership to the trust. It's essential to have both a will and a trust when it comes to protecting your loved ones. Trusts are rarely questioned, partly because their details are not public.
In addition, the rules for contesting wills are well established, while there are fewer laws relating to challenges to trusts. Wills and trusts have their advantages and disadvantages; for example, a will allows you to name a guardian for children and specify funeral arrangements, while a trust does not. On the other hand, a trust can be used to plan for disability or save on taxes. Your lawyer can tell you how best to use a will and trust in your estate plan. Special needs trusts are legal agreements that allow individuals with special needs to receive financial support from the trust for private purposes without jeopardizing their eligibility for federal and state public assistance programs. You can also use your will to establish a testamentary trust for young children or name a custodian under the Uniform Transfer to Minors Act.
In some cases, a transfer will may create a testamentary trust to maintain and manage assets for the benefit of designated heirs, such as minor children until they reach maturity. It is essential to make a will or a trust to ensure that the surviving couple is recognized and financially protected. Some people think that using primarily a will rather than a living trust is more efficient in the long run because it is easy to transfer assets into or out of your estate when they are owned by you in your name. However, if assets are transferred to a trust with the intention of avoiding creditors or in circumstances that indicate that it would be reasonable to assume that creditors would seek the assets, the trust is unlikely to isolate assets from creditor claims. Unlike wills that come into effect at the time of death, trusts become effective by transferring assets into them. Provided that the grantor has relinquished any control and beneficial interest over the trust assets, income from trust assets is not included in the grantor's taxable income and assets are not included in the grantor's estate. When you leave property to a minor using a living trust, the trustee manages the property until the child reaches an age determined by you. Master charitable trusts and remaining charitable trusts that meet certain technical requirements of tax code can serve dual purposes: providing special benefits for certain irrevocable trusts that benefit charities while providing some economic return to their grantor or beneficiaries. One of the most effective ways to make things easier for those you leave behind is by creating a trust as part of your estate planning.
If your estate is not significant or your assets are limited and simple (e.g., residence and financial accounts), creating a trust may not be beneficial and could cost more than it is worth creating and managing. If the trust is irrevocable and you have completely waived all property rights, assets can be excluded from your taxable estate. Financial firms require substantiation before accepting instructions from successor trustees.