Are you actively saving for retirement? If so, you’re doing much better than a huge number of Americans.
But don’t get too comfortable yet. While funding your retirement plan is important, it’s not the only thing you need to do. You also need to start planning for what happens after you pass away.
If you plan well, your wealth will outlive you. And if you would like to ensure it doesn’t go straight to your favorite Uncle Sam, but rather to your dependents, you need to plan accordingly.
What is the difference between a trust and a will, and why are they so important to think about, long before retirement age? Keep reading to find out why writing a will and opening a trust are some of the most responsible things you can do right now.
What Is a Will?
When it comes to wealth distribution after death, most people think of having a will. A will is a document you create before you die, that describes how you’d like your wealth, assets, and personal property to be distributed once you are gone.
Most often, this means deciding what each of your children and grandchildren will receive regarding your estate. Without a will, your estate can be passed to your surviving spouse, which is an automatic process (for the most part) in the US.
You can include nearly any request in a will. And since you should create one as early on in life as possible, it should change over time. For example, if you have young children, you can request who would become their legal guardian if you were to die while they are still minors.
Your will can also provide funeral and burial instructions.
Most often, wills are used to direct who receives your assets and valuables, such as cars, property, and asset ownership like stocks. You can pass them to your children, other family members, friends, and charities.
Keep in mind that a will is different from a living will. A living will is a document describing end-of-life medical care, in the event you cannot communicate your own decisions any longer.
Enactment of a Will
To enact a will and follow its instructions, your estate and will become public information. They go through a process called probate, which the judicial court system handles.
Probate courts will go through your will, along with your surviving family members, and distribute the assets accordingly. Probate can be a long process, and potentially expensive. It can also become more difficult if family members contest the wishes in a will.
What Is a Trust?
A trust is an entity you create to pass assets onto your heirs through the use of a third party. You create a trust, place your assets inside the trust, and appoint a third party to manage the trust and distribute the assets to heirs at the appointed time.
While there are different types of trusts, the most common is the revocable living trust. These are trusts you create while you are living, and can go into effect while you are living.
Because they are revocable, they can be changed at any time. So if you create on in your 40s, and continue acquiring assets long into your 60s, you can add these to the trust at any time.
Enactment of a Trust
Once you die, the assets in the trust can be delivered immediately to your beneficiaries, without going through the probate process. This saves a lot of time and a lot of money on attorney fees. Probate often takes months before your heirs can receive your assets.
It also makes the process much easier for your family, who are also dealing with personal grief.
Difference Between a Trust and a Will
A will only become active after you die. A trust is active the moment that you sign the document.
A will can be used to direct assets after death. But it can also name other requests, like guardianship of minor children, and burial wishes. A trust is used purely for transferring an estate to your heirs.
A will needs to go through the probate court before your heirs can receive assets. But assets in a trust are passed immediately upon your death, bypassing the probate process.
In the probate court, your family members have the opportunity to contest your will. But they cannot contest a trust.
Why You Need Both
Both a trust and a will can be used to distribute assets to your heirs upon your death. But if you have a lot of wealth to distribute, one vehicle (a trust) is clearly more beneficial to your beneficiaries.
But a trust doesn’t handle everything. A will can be used to describe your wishes regarding your burial and your children.
For those with a decent estate to pass on, having both a trust and a will is a good idea. They are not mutually exclusive and can work together.
Many times, people will forget to add a new asset to a trust, and as a backup plan, their will can distribute it.
If there are ever conflicting wishes between a trust and a will, a trust will normally trump the will, since the trust is its own entity.
Estate Planning Done Right
You can take the DIY approach to both a will and a trust. You can just write out your wishes on paper, and sign them if you desire.
You can also spend a few hundred dollars to use an online template and legal service to make both a trust and a will.
But if you have a decent amount of wealth to pass, hiring a lawyer that specializes in creating wills and trusts is well worth the expense. Having a professional, specific will and trust can make the process of receiving assets as seamless as possible for your grieving heirs.
Responsibility Starts Today
On the surface, the difference between a trust and a will might seem blurry. But they are two very different processes of passing down your estate to your heirs.
Forming a living trust is the easiest process of distributing your wealth to heirs upon death, saving lots of time and heartache. But having a will is just as important.
Looking for tips on managing your finances? Check out other articles on our blog today.