Estate planning is also an important step in taking care of what matters most: your loved ones and the life you’ve worked hard for. Two of the options are a revocable trust and a will. But which one is the best choice for your estate’s needs? Here is a comparison to see how the two stack up. Consider working with a financial advisor as you do estate planning.
What is a Revocable Trust?
A revocable trust suggests what it is in its name – changeable. It is a legal entity into which an individual distributes assets to be distributed or kept over the course of, and after, their life. With a revocable trust, the grantor (creator) can return to the trust and revise its conditions. They can make alterations to how it works, or they can cancel it altogether.
While the trust is in force, the grantor can receive an income from it. Once that individual passes on, the assets are distributed to the trust’s beneficiaries. Prior to death, the grantor names a trustee who is in charge of this distribution. They have a fiduciary responsibility to ensure that the funds are used appropriately according to the trust’s terms.
However, it’s common for revocable trusts to have beneficiaries take over the trust. It is up to the grantor to designate one or more beneficiaries, but one example of this relationship includes a parent and child. A parent will create a revocable trust for a child. That child then owns the trust once the grantor passes or the child hits a certain age. However, this beneficiary designation can change at any point up until the creator of the trust’s death.
What Are the Benefits of a Revocable Trust?
Trusts are popular, in part because they allow you to protect your assets, from the moment you make the trust to after you pass on. Generally, they reduce confusion and streamline the distribution of assets. In particular, they keep your family and other beneficiaries out of the probate court.
Moreover, it’s possible to use a trust to reduce associated costs. A will has the potential to be unclear or confusing. That may result in loved ones having to go to probate court to fight for their distribution of assets. With a revocable trust, the allocation process is quicker and cleaner. It can help beneficiaries stay out of court and, thus, save them money on legal fees. On top of that, a revocable trust doesn’t need court approval, and it stays private since probate is a public process.
Of course, a revocable trust is also convenient. You can return to it at any point and change the conditions. That may be helpful to anyone experiencing changes in their personal situation. For example, you might want to alter the terms if you go through a divorce or get married.
What Are the Drawbacks to a Revocable Trust?
While the beneficiaries cut back on costs, the grantor may not. It takes sufficient time and funds to set up a revocable trust. Although the money is possibly comparable to the fees of probate court, it still has its price.
You have to sign off on all the appropriate paperwork for your various assets, obtain retitling and contact the associated institutions. That means the different companies and groups tied to them, such as your bank and insurance providers. These steps may be even more demanding if you don’t have a trust that is fully funded. So, certain holdings might not be worth it.
There are also no tax advantages to a revocable trust. And, the assets aren’t safe from possible creditors during the grantor’s life.
What Is a Will?
A will is one of the legal documents you may encounter when you begin the estate planning process or plan for your passing in general. In a will the writer puts down what they want to happen following their death.
The creator of a will may put several requests in it, according to the needs of their estate and beneficiaries. You’ll typically see a person dictate how they want their property and assets distributed as well as the designation of the executor. The executor, like the trustee of a trust, ensures that the will is followed out accordingly.
There are other details that a will may include, depending on the writer. If the individual in question has children who are minors, the document will name their legal guardian. Or, they may make a bequest, i.e., a gift. This may be a specific gift, such as a ring or collection, demonstrable gift, which allows the beneficiary to receive an item from a specific source, a general gift, that typically involves money, or a residuary gift, which is the last of the estate after the preceding gifts are given.
What Are the Benefits of a Will?
There are several reasons why any person, regardless of the amount of wealth they own, should consider making a will. To start, it can help you designate which individuals or entities you want to give your assets. From there, a will also allows you to choose how much and what each person or group gets. So, you can parcel out your possessions, property and money as you see fit.
That process is an important step for protecting your intentions and legacy. By naming which people inherit your assets, you keep them out of the hands of people who don’t deserve them. Additionally, you ensure that the funds or possessions are used according to your wishes. Without that, they can be misused or misappropriated.
A will is also an important space for taking care of dependents. You can choose who will take of your underage children, which is a vital decision for any parent.
What Are the Drawbacks of a Will?
While a will can protect your wishes, it also has its disadvantages. Just like many legal documents, wills have rules that determine their validity. Each state has different regulations that make a will legally sound. So, if you are not careful with constructing your will, it loses its weight.
An unclear document or a will that only partially covers the whole estate can also lead to legal issues. If there is no legal will at all, then it falls under intestate rules. This results in the same thing as an ambiguous will: probate court.
Probate court is a public proceeding that determines the authenticity of a will. It also decides how to follow the writer’s wishes in the distribution of assets. That is, only after the court has appointed an executor, located the assets, appraised the estate, dealt with creditors and paid off any debts. So, probate court can be long and expensive for those involved.
Revocable Trust vs. Will: Key Differences
A will is a written document that details an individual’s wishes. It varies from gifts to guardianship to asset distribution and more under the direction of an executor. It’s effective in helping transfer your estate following your death but comes with complications. If it is not carried out according to your state’s laws, then it loses its legal validity. That can result in your beneficiaries going to probate court to win the assets you intended to pass down. However, the court has the final say, which can lead to your spouse or children losing necessary support.
Some wishes put in a will may be more personal, as well. They occasionally include directions for funeral arrangements and have documents attached that dictate a final message.
In contrast, a trust allows you to guard or distribute your assets almost immediately. Once it is set up properly, it takes effect. It bypasses the need for court approval, though. It comes with a heftier set-up process than a will, including initial costs, but it also saves legal fees in the long run.
They’re often useful for complex estates and come in handy in case of an emergency. Since they don’t need to take effect upon death, you can use them to provide for your beneficiaries if you become incapacitated.
Revocable Trust vs. Will: Which One Is Right for You?
Wills are a line of defense against the probate court. It’s also easier than a trust and cheaper to set up. That may be necessary if you’re working under a time limit or in a stressful situation. Additionally, you might not have a complicated estate. If your estate plan is relatively simple, a will might be enough to keep your loved ones out of probate court.
Trusts are a valuable option if you are concerned about privacy. Your finances stay private since the court doesn’t get involved, which may help if you have a complex estate. The more requirements your estate has for its asset distribution, the more you may want to keep things out of the public eye. That way, you can ensure assets stay between trusted individuals. So, a trust is also a good way to keep wealth in the family. A well-built trust keeps your assets safe and allows money to pass on to the next generation if you wish.
Another important matter to remember is that a trust is useful outside of death. It also helps if you become incapacitated at any point.
The Takeaway
Every estate is different in size and needs. It’s up to each individual to create an estate plan that fits their unique situation. Wills and trusts are both important steps in many people’s estate plan. Furthermore, they protect your assets and ensure your loved ones are supported. Some people may benefit from the help of a financial advisor who specializes in estate planning. They can help simplify the process and ensure you don’t make mistakes. That way, regardless of whether you choose to use a trust and will together or not, you’ll save your loved ones stress. Minimizing legal concerns allows them to focus on what matters most instead of how to manage your assets.
Tips for Estate Planning
You may want to create own trust but need some guidance. A financial advisor is a perfect solution. They have the knowledge to help you navigate any concerns and tailor their advice to your needs.
Putting off estate planning is tempting, especially if you’re young. But, it’s important work that protects your loved ones in the long run. Creating a will is one of the first steps you might take. It provides you security and ensures there’s a plan in place in case of an emergency.
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