While it may not be one of the most enjoyable activities to deal with, estate planning is essential in arranging your financial affairs. It makes sure that your assets are protected and properly distributed to your loved ones once you pass on. But a critical part of your estate plan is your will and trust, and while many people have heard of the two terms, only some know the difference between them. These two legal instruments serve as the foundations of your estate plan.
Depending on your situation, you may either only need one or the other or even both. Each serves a different purpose, but when combined, it can make a concrete estate plan.
Understanding the Difference Between Wills and Trusts
Wills and trusts are often seen as similar legal instruments in an estate plan, as they are both a way to announce who gets to keep which of your assets. While this is true, there are many differences between the two.
Simply put, wills are written legal documents that contain the wishes of the deceased person concerning the distribution of assets among family, friends, or even causes, and, when applicable, the care of children who are still minors. Without this, your assets might end up with people you didn’t choose, or you could leave out someone to whom you intended to give something. This can cause many issues to arise, and your loved ones will end up needing professional assistance from attorneys who deal with trust and estate disputes.
Drafting a will before you pass on can help avoid these issues between your loved ones when the time comes.
Why Do You Need a Will?
Oftentimes, wills are seen as something that only wealthy people with many assets possess. But this isn’t necessarily true. There are more than a few reasons you might want to have a will:
- Having the ability to decide who does and doesn’t get your assets and how much they get
- Establishing who takes care of your children once you pass on
- Giving your heirs easier access to their assets
- Offsetting your estate tax through gifts and charitable donations
What to Consider
If you want to ensure that your will gets carried out to the fullest extent, draft a testamentary will. When drafting your will, there are several things to consider. Some of them include the guardianship of any minor children, funeral instructions, and the appointing of your executor.
Some people write their first will after the birth of their first child, which is an ideal way to ensure the safety and protection of your child in the case that you and your partner are no longer around. It’s essential to consider a few things when it comes to choosing your child’s guardian, such as:
- Their lifestyle, principles, and values, and if they fit with yours
- Someone your child is already close to
- If the guardian in question is agreeable to the idea of children
- Whether they can support your child physically, emotionally, and financially
You can also write down your wishes for your children. What values, education, and extra-curricular activities would you like them to have? Where would you like them to live? You can also give them advice to prepare them for the future.
In your will, you can also include your funeral instructions to help make sure that your loved ones and your executor are aware of what your wishes are when you pass on. For instance, whether you would like to be buried or cremated and where you would want to be placed after. You can also choose to be an organ donor.
You can also choose to appoint an executor who will act on your behalf to ensure that your wishes are fulfilled. Your executor can be someone you fully trust or even a legal professional.
Trusts aren’t for everyone. Not only do they cost more, but they are also time-consuming. However, they do allow your heirs to hold title to the assets you choose to give them without having to go through probate, which often takes months.
When Do You Need a Trust?
While trusts aren’t just for the wealthy, you may only need one if you have a significant amount of assets that you want to distribute to your heirs with different instructions. Some benefits of having a trust include:
- Protecting your beneficiaries from making poor spending and investment decisions
- Managing assets that aren’t easily divisible such as pets, vehicles, and real estate
- Avoiding court-supervised probate
- Managing your assets and bills in case you become incapacitated
What to Consider
Before deciding to have a trust, some of the things you have to consider are what you want out of your wealth and what your goals are.
Whether you want to save your wealth to pay for your grandkids’ education or create a foundation for a cause close to your heart, it’s important to discuss your plans with a wealth advisor to help you make the right decisions.
The Bottom Line
Wills and trusts aren’t something many people like to think about as it deals with the issue of our mortality. However, you never know what may happen. That’s why it’s crucial to be prepared for the possibility of illness or death so that you can take care of yourself and your loved ones. Each legal instrument has its advantages and disadvantages, and it’s important to remember that the best choice for someone else may not be the best choice for you.