Will vs. Trust
A will and a trust are two basic components of a normal estate plan.
This article will explain the difference between a will and a trust, and will also explain how a will and a trust can work together in an estate plan.
Estate Planning Basics
An estate plan is a group of legal documents that control your property, both during your life and at your death. A basic estate plan typically should include a will, a trust, a health care power of attorney and a financial power of attorney.
A power of attorney is a document that allows another person to make decisions on your behalf, such as financial or health care decision in case you become incapacitated.
A will is a legal document that regulates what happens to your property when you die. In a will, you describe all of your property and name a person or entity who you will give the property to when you die.
A trust is a legal relationship that is normally created during your lifetime. A trust is a three-party agreement involving the trustor, trustee and beneficiary. The trustor is the person who creates the trust and provides the property for the trust.
The trustee is the person who manages the trust, usually a bank or attorney, but sometimes a friend or family member. Finally, the beneficiary is the person or entity for whom the trust is established, meaning it is the person who will receive the benefits of the trust.
Example of a Trust
You own a home and two cars. You create a trust, naming your attorney as trustee, and your children as the beneficiaries. Then you transfer your home and two cars to the trust. This means your trust now owns the home and cars.
That way, when you die, the trust property (i.e., the home and two cars) automatically pass to your children, the beneficiaries.
Example of a Will
You own a home and two cars. You put a provision in your will that says you want your home to go to your wife and your two cars to go to your only child.
When you die, the will goes into “probate,” which is the formal legal proceeding for administering a will, and the home is passed to your wife and the cars to your child.
Why Use a Trust?
A trust is beneficial because it can help avoid probate. If you use a will, the will has to go through probate, which can be a long, tedious process and can also result in taxation from state and federal governments.
However, with a trust, the property simply passes through the trust, so you avoid probate and any associated taxes.