Trusts vs. Wills: Which One Should You Have?

trusts vs. wills
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Many people die each year with no plan for their assets after death. There are multiple ways to transfer assets after death, including a living trust and a will.

When you understand the difference between the two, you can make the best decision to designate what happens to your estate after death.  

The main difference between a living trust and a will is that the trust becomes active as soon as it is signed, while a will becomes active at death. While a living trust can be changed while you are alive, a will cannot be changed except to write a new will that supersedes the old one.

The living trust and the will are helpful estate planning tools. They can work together or independently to outline what happens to your assets at death. This article will explain the differences to help you make an educated decision.

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How Does a Will Work?

A will is a document that specifies who is to receive your money, property, and any other assets when you die. A will only becomes active when you die, and the document must go through probate court before disbursement of the assets.

The probate court authenticates the will and establishes the authenticity of the executor who can distribute your belongings and money to the beneficiaries. Probate court typically takes up to six months to sort out the will, causing your loved ones to wait for what you have willed to them.

In almost every state, there must be the filing of an estate tax for estates of over $1,500,000. 

Reasons to Have a Will

Having a legal will offers several benefits to your surviving loved ones. Many people assume that their money, property, and other assets will automatically go to their loved ones at their death, but this is not the case.

A will ensures that your loved ones get what you leave for them.

It Makes the Process Straightforward

Having a will in place simplifies the process of distributing your money and belongings after death. Your family and loved ones will be grieving the loss of someone they care about, and having a will prevents undue stress of deciding what to do with property and assets. 

It Protects Minor Children

Part of the will establishes who will be the guardian of minor children in the event of your death. Specifying who you want to care for your children will protect them and help smooth the trauma of losing a parent. 

A will also clarifies how much of your estate the minor children receive upon your death. 

It Sets Aside Coverage for Funeral Expenses

Your family will need to pay for your funeral as well as any estate and inheritance taxes. When you have planned this in your will, they will only need to follow what you have arranged.

Setting aside money for these expenses is part of the declaration of the will. 

How Does a Living Trust Work?

A living trust works by holding all your assets in one legal document. It is termed ‘living’ because you form the trust while you are alive, and you can change the assets within the trust during your lifetime.

The primary reason someone would choose a living trust to disperse assets after death is that the trust does not pass through the probate court.

This can be a prolonged process where the appointed court representative examines a will. The living trust bypasses the probate court to put the assets in possession of the beneficiaries more quickly.

Reasons to Have a Living Trust

Among the reasons to have a living trust are financial protection for your spouse and children. Not only does the living trust keep them financially stable as they sort out the details of life without you, but it also reduces the stress of figuring out your accounts and other crucial information.

It Preserves Your Privacy 

A living trust is a private document that does not have to be evaluated by the courts to be valid. Compared to a will, the living trust is entirely confidential. This means you can leave your assets to whomever you want without having to share those assets with the official court. 

It Minimizes Estate Taxes

For those who have substantial assets, choosing a living trust will protect the living spouse from paying estate taxes to receive the inheritance. Since the assets remain in the trust and the surviving spouse is the beneficiary, they will have unlimited access to the assets without paying the high tax rate. 

It Designates Someone to Speak on Your Behalf in Cases of Mental Incapacity

The average lifespan often extends past when a person is mentally aware, such as in the case of Alzheimer’s dementia. When this happens with no prior planning for what should happen to assets and who should care for you, the courts can end up making those decisions.

The living trust will allow your designated person to take over for you without interruption or court involvement. 

It Prevents Any Contesting of Your Will

Contesting a will can be a simple matter of claiming that you were not of sound mind when you signed the will. However, a living trust is much more difficult to dispute. 

To contest a living trust, someone must prove that you were incompetent for: 

  • Every property transfer
  • Signing the living trust
  • Investment choices
  • Distributions

Disputing a living will requires significant time and money, unlike a will that costs nothing and pays on a contingency.

It Manages the Estate for a Minor

When you possess a consequential amount of money and assets, and something happens to you, if you have minor children or beneficiaries who would not be ready to handle such large sums, a living trust will manage the estate until an appropriate time. 

This not only protects the inheritance, but gives the beneficiaries time to mature before receiving a sizable sum. The estate continues to provide for them in the meantime until they are of age to take over the money and assets.

Should I Setup a Living Will or Trust?

Which is better: a living trust or a will? The answer is both since they can work together to let you choose what happens to your money and assets after your death.

Having a living trust will eliminate the need for a probate court to transfer your estate and money to your heirs after you die. While a living trust is costly to set up, the protection it affords you and your heirs is invaluable. 

Many experts recommend having a will, too. This is especially important when you have minor children who will need a guardian.

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