There are many misconceptions and urban myths concerning estate planning. People often belief things that are simply untrue. Typically, everyone agrees on the common goals for estate planning: providing for loved ones, protecting assets, and avoiding taxes and probate.
All of these items are important goals, and all can be accomplished through the proper planning mechanisms. The purpose of this article is to clarify the misconceptions for estate planning, and provide an understanding of which design best aligns with your needs.
What is the difference between a will and a trust? How do I know which design is best for me?
There are a few reasons why either a will or trust based estate plan would be preferable in a given situation. To understand which design best suits your needs, it is necessary to understand the difference between them.
The most significant difference between a will and a trust is this:
- A will is a one-time transfer
- A trust allows managed distribution over time
What does a will do?
A will can provide for specific beneficiaries to receive specific aspects. For example, a will might identify that accounts go to Uncle Charlie and real estate and contents go to Daughter Sue. Whichever way the will designates property and assets, is how they are distributed outright to the chosen beneficiary.
However, the chosen outcome may not always be the desired outcome. Providing for an outright transfer could create problems that are contrary to the planner’s desire.
What does a trust do?
A living trust is simply a mechanism to allow continued management and direction for assets. You would own the assets during your lifetime, and have full discretion to buy, sell, manage, and fully control all assets during your lifetime, and have full discretion to buy, sell, manage, and fully control all assets in the trust. The trust operates under your social security number, and is legally seen as an extension of you. Generally, it does not even require establishment of new accounts. You continue to live your life as normal, but you simply title your assets in the name of the trust.
Generally, the reason someone would create a trust would be the following:
- There are minor children who cannot inherit all at once, causing any inheritance for a minor to be overseen by a judge in probate court.
- The desire to spread distribution over time and avoid receipt of an inheritance all at once.
- The desire that specific amounts are to be used for specific purposes, allowing the trustee to make sure an inheritance is wisely spent.
- Providing certain conditions on distribution of an inheritance, so as to make sure that creditors, divorcing spouses, and others cannot assert rights to receive the beneficiaries’ inheritance.
These are the common reasons why a trust would be chosen over a will. If a will is used to provider for a minor child, the matter would have to go to court and be overseen by a judge until the child is old enough to legally inherit, at which time the child would receive the full inheritance outright. A trust avoids this scenario and minimizes fees. A trust alone provides for control and management to help preserve assets, and provide the best outcome for the beneficiary, including designating appropriate use of the funds, protection of the funds from creditors or divorcing spouses, and avoiding rapid consumption to the determent of the beneficiary.