Wills and Trusts 101
When you look at your list of daily tasks and appointments, what jumps out? The presentation that you have to prepare? The trip that you need to plan? The start of your daughter’s soccer game?
Thanks to all of these seemingly urgent tasks, one of the last things on your mind is probably writing a will or thinking about putting your assets in a trust–both of which can ensure that you leave loved ones properly cared for, prevent disagreements among possible heirs and prevent unnecessary attorney fees from eating away at your estate.
We’ll explain the differences between a will and a trust–not to mention just how important this kind of documentation is, especially at the time of death.
Wills and Trusts in a Nutshell
What Is a Will?
A will is a document that tells legal authorities what should happen to your possessions when you die. It can be any length, and in most states, it must be witnessed by others who agree that you have the mental capacity to make your own choices.
If you have minor children, it designates their legal guardian (with whom your children would live), and sometimes a financial guardian, who’d make sure that your assets are distributed to your kids appropriately through their minor years and in full when they reach legal age or another designated date. After you die, a will must be verified as valid in “probate court,” which is a court of law that deals specifically with wills and estates.
What Is a Trust?
A trust is akin to a mini corporation through which property intended for the benefit of one party, the “beneficiary,” is held by another party, the “trustee.” The trustee and the beneficiary can also be the same person; sometimes there are many beneficiaries, and sometimes there are many trustees.
Trusts allow your assets and possessions to skip the probate court process and go directly to intended recipients, saving time and money spent on court and attorney fees.
Trusts can also be arranged to cooperate with laws currently in effect, in order to avoid various types of taxes. But if the law changes by the time you die, aspects of the trust governed by former laws may no longer result in the best tax outcome.
Why Wills and Trusts Matter
Unfortunately, 65% of American adults do not have wills, according to a 2010 Harris poll conducted for Lawyers.com. And the numbers don’t improve for older Americans: Four in ten baby boomers also lack one, based on a 2012 survey conducted by RocketLawyer.com.
Without a will, you take a risk. Your money, house, car, boat, other material items and minor children land in limbo–with no clear recipient, beneficiary or guardian to receive them.
The same RocketLawyer survey also found that half of Americans with children do not have a will. If you have kids, and you don’t create a will before your death, the probate court will decide who will be the guardian of your children. Although this is usually the closest family member, without specific instructions, your kids could end up in an environment that’s not to your liking.
A trust is geared toward folks with a positive net worth and assets, such as cars, houses, savings accounts and a substantial amount of life insurance. If you don’t have much in the way of assets, a trust may not be necessary.
A trust requires planning, maintenance and can be more expensive to create than a will. However, upon your death, the trust will be immediately transferred to your beneficiary, with no lengthy and costly probate involved.
A trust can be very important for women and men in same-sex marriages because federal law does not yet accept such marriages, as well as for unmarried heterosexual couples. Since same-sex and unmarried couples can’t use the same estate tax exemptions and other tax loopholes as heterosexual married couples, trusts allow a partner to pass assets to the other partner without having to pay taxes that heterosexual married couples are exempt from paying.