Contributed by Noelle Fauver, community outreach manager for Trust & Will. This post originally appeared on the Trust & Will website and has been modified here with permission.
You’ve heard the terms “will” and “trust” from an estate planning perspective, but do you understand the difference between each? And, do you know which plan will best protect your family and assets?
Let’s break down what you need to know about wills and trusts in estate planning.
Will vs. Trust
While wills and trusts have overlap, there are also critical differences between the two. Ultimately, both methods specify who will receive your assets. They just do it in different ways, each with advantages and disadvantages. One big difference is in how and when they take effect. Wills don’t go into effect until you pass away, whereas a trust is effective immediately upon signing and funding it.
It may be easier to think of a will as a “simple” document. Wills allow you to:
• Name guardians for kids and pets
• Designate where your assets go
• Specify final arrangements
While it is an easier process, the simplicity of a will comes with drawbacks.
For example, wills offer somewhat limited control over the distribution of assets. They also most likely have to go through some sort of probate process after you pass away.
A trust is a bit more complicated, but can provide great benefits. Trusts:
• Offer greater control over when and how your assets are distributed
• Apply to any assets you hold inside the trust
• Come in many different forms and types
Keep in mind that after you create a trust, you must fund it by transferring assets to it, making the trust the owner. This does make trusts a little more complex to set up, but trusts have one major benefit over Wills: They’re often used to minimize or avoid probate entirely, which can be a huge plus for some people and may justify the additional complexity of setting up a trust.
Can You Have Both a Will and a Living Trust?
Short answer: Yes, because they do two different things. Trusts provide for the management and distribution of your assets during lifetime and after death. A will, on the other hand, enables you to do things like name guardians for your children, appoint an executor for your estate, and declare your final wishes. So what’s actually more crucial to understand is the type of will to have with a living trust to create a comprehensive estate plan.
Let’s say you have both a last will and a living trust. This is not necessarily recommended and here’s why: The assets that are included only in your last will likely have to go through an extensive probate process. Also, last wills are public documents. Conversely, assets included in a trust are typically protected from probate court.
Enter: The Pour Over Will
Most revocable living trusts include what’s called a “pour over will,” which is a type of will designed to work in conjunction with your trust. With a pour over will, anything a person owns outside of their trust—as well as anything that is subject to their last will—will be paid to their trust at the time of their death.
Pour over wills essentially act as a backup plan to ensure all of your assets go under your trust.
Note that a living will is also different from a last will and a pour over will (yes, the names can get confusing). A living will refers to a set of documents related to an individual’s medical decisions, including:
• Medical Power of Attorney
• Advanced Health Care Directive
• HIPAA Authorization Form
Do Wills Require Probate?
Just because you take the time to create a will, it doesn’t mean your estate will avoid probate. Probate is the process your estate goes through after you pass away if you haven’t done proper or comprehensive estate planning. It is a court-supervised proceeding, and can be costly and take a long time.
However, there are ways to simplify, or even eliminate, the probate process. One highly effective way is by creating a trust. Anything you put inside your trust can be passed down, avoiding probate. A big benefit to a trust is that distribution of assets remains private, whereas distributing assets through a will and probate are public.
Wills After Death
Your last will and testament takes effect once you pass. At that time, someone must notify the court to begin the probate process. Settling your estate and distributing property and assets can be a lengthy, costly process.
Another significant consideration is that since your will only takes effect after you pass away, if you become incapacitated and unable to make decisions, you have no recourse or plan as directed by your will. On its own, a will is essentially useless while you’re alive. This means a will, on its own, is not an effective end-of-life planning tool.
Trusts Impact Life and Death
Because a trust instantly takes effect as soon as you sign it, it can simplify the process for those around you. Unlike a will, your trust not only plans for after you die—it’s a document intended to have an impact while you’re still alive. A trust can set provisions for things like what you want to have happen if you become mentally or physically incapacitated. Most importantly, a trust makes your wishes known, both during your lifetime and when it ends, which can eliminate a great deal of stress both for you and your family.
Planning for the future is important on so many levels. There are a lot of pieces to the puzzle, and too often people think “I’ll get to it later.” That’s risky. If you become unable to make decisions, and you haven’t put a plan into place, the burden and stress will fall on your loved ones. Creating an estate plan is a true gift to yourself, your family and friends.
The peace you’ll gain from setting up your future is worth it. Get started today, worry less tomorrow.
For more insights and inspiration from today’s leading entrepreneurs, check out EO on Inc. and more articles from the EO blog.