It is important that you include all key documents in your estate plan. This will likely involve either a will or a trust and in some cases an estate plan may have both documents. The objective of both of these estate planning instruments is to ensure that your assets are distributed to your beneficiaries and heirs in the way that you intended. Failure to have either one of these essential estate planning documents in place can result in serious consequences for your intended beneficiaries in the case of you passing away.
What is a will?
This is a legal document which provides instructions as to how you would want your assets to be managed and distributed upon your death. The will can also determine who will take guardianship of your minor children. It can also provide instructions on your preferred funeral arrangements.
What is a trust?
Similar to a will, a trust is also designed to ensure that your estate’s assets are distributed to your beneficiaries in the manner you intended in the case of your passing away. However, a trust differs from a will in that a trust actually creates a fiduciary duty for another party, the trustee, to hold title to your assets for purposes of benefiting your chosen beneficiaries.
There are two types of trusts you can employ in your estate planning: revocable and irrevocable.
Revocable trust
A revocable trust would be created while you are still alive and can be revoked by you, the trustor. This type of trust is also known as a living trust. You will maintain ownership of the trust assets as long as you are alive. However, once you have passed away the trustee will hold title to your assets and will be responsible for managing and distributing your estate’s property.
Irrevocable trust
On the other hand, an irrevocable trust will give the trustee title of your assets while you are still alive. Also, once the irrevocable trust has been established it cannot be revoked by you, the trustor. This type of trust may be advantageous for tax liability as well as other objectives.
Probate court
Another important difference between trusts and wills is the requirement to go through the probate process. Many prefer trusts because they are not required to go through probate which can be quite costly and cumbersome for your intended beneficiaries. Wills, on the other hand, are required to go through the probate court process. Also, the legitimacy of a will can be challenged in court, while usually trusts are protected from being challenged.
Is a trust or a will better?
Both wills and trusts have advantages and disadvantages. Wills are generally less expensive than trusts. However, trusts, due to avoiding probate, are usually more streamlined and efficient when it comes to the distribution of your assets to your heirs. On the other hand, a will allows you to determine guardianship of minor children, which is something that a trust cannot do.
Whether a will or a trust or both is the right estate planning strategy for you will depend on your specific situation and circumstances. A professional wealth management advisor will have the expertise and knowledge necessary to help you decide between the two types of estate planning strategies.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.