Everyone should know the basics of estate planning. Estate planning requires you to get your plans in writing so that you're covered. Wills and trusts are the cornerstones of the estate planning process.
What is a will? What is a trust?
You'll need to learn the answers to these questions, along with the pros and cons of each, as you move forward with your estate planning process. To this end, read below to learn more about wills and trusts and how to put them together.
Why is Estate Planning Important?
When you do not have an estate plan, you're only leaving yourself open to the laws and interpretation of your state. Each state has its own laws and procedures, but often the statutory default may not produce the result that you want. The only way to know that your family is taken care of is to put your wishes in writing. Creating a Last Will and Testament is a major part of the estate planning process, which is part of the wealth-building process as a whole. Trusts are also a cornerstone of estate planning and handle matters that wills don't.
Understand the Differences Between Wills and Trusts
It's important that you learn the differences between wills and trusts. Consider the differences between the two:
1. A Will Only is Effective at Death
The key difference between wills and trusts is that wills aren't effective until you die. At that point, the will is recovered and executed accordingly. A trust, often called a living trust, takes effective as soon as it is created and signed. As such, trusts often include information that is applicable to decisions while you are still alive, rather than simply passing down assets after you die.
2. Wills Have to Go Through the Probate Process
In order for a will to be validated, it'll have to pass through the probate process. The probate process refers to a situation where a judge goes through your will, examines it for its legitimacy, and passes a decree for it to be executed accordingly. Unlike wills, trusts don't require the probate process.
3. A Trust Can Make Provisions for the Transfer of Assets to Heirs
With a properly executed revocable or irrevocable trust, you can transfers assets to your heirs with more flexibility. For instance, since a will takes effect when you die, your kids can not immediately take possession of property if they are not of majority age. However, trusts account for this fact as they contain contingencies that come into play once your children reach a certain age. Trusts are open-ended in this regard, and you can create provisions that let you pass your assets along however you'd like.
4. Certain Type of Irrevocable Trusts Can Protect Your Family From Creditors
When your children owe a lot of people, any money that they get from their inheritance from a will can be up for grabs. However, trusts make provisions for this. With a trust, you can prevent the inheritance from being put in the name of your beneficiaries. As such, creditors that are after their money won't be able to get a hold of the money you're passing along.
5. Trusts Make Contingencies For Disabilities
People that deal with disabilities often receive money from the government to get treatment. If they inherit a substantial amount of money via a will, it could put their Medicaid or Social Security benefits in jeopardy. With a trust, however, you can make contingencies for this, so that they can receive the assets without it putting their disability benefits at risk.
6. You Will Minimize the Amount of Estate Taxes That Your Estate Incurs
As with any other form of assets or income, taxes can easily eat into the estate value. If you want your loved ones to receive their full inheritances, a living trust is beneficial, because it reduces estate taxes. Cutting out these estates taxes can save your beneficiaries $100,000 or more once it's all said and done. A will doesn't reduce these taxes, so your beneficiaries will have to pay more.
7. The Witnesses Required to Finalize the Documents are Different
When it's time to finalize your will, you will need to acquire two witnesses that have nothing to do with the estate of the person who is signing the Will. However, since a trust is a contract, you only need to get the stamp of a licensed notary public.
8. Wills Address Other Issues such as the Guardianship of Your Children
When you set up a will, it's about a lot more than just the money or assets that you pass along to your estate. It also covers things like who will take custody or guardianship of your kids if you die. It's important to get these sorts of details in place early so that your family is taken care of after your passing.
Get Help With Your Wills and Trusts
Wills and trusts both serve different purposes, but they're both important features of a solid estate plan. Each has different requirements, pros, and cons. Many people decide to use both a will and a trust in their own estate planning.