In estate planning, trusts and wills serve valuable asset distribution purposes. However, understanding the key differences between the two is essential for making an informed decision about the best option for your situation.

Trusts are a flexible tool that can help reduce taxes, avoid probate, and protect against incapacity or mental disability. Wills, on the other hand, must go through probate and become a public record.

Control

Regarding estate planning, there needs to be more clarity around the difference between a trust and a will. Understanding the difference can greatly impact what happens to your assets after death and how you provide for those you love.

The main distinction is that a will requires probate while a trust does not. Probate is a court-supervised process that verifies the legal validity of a will and transfers property after a person’s death according to the will’s terms. Probate is a complicated and expensive process, but ensuring that the will is valid is essential. When establishing a trust, you can specify the words precisely, controlling how and to whom assets are distributed. For example, a revocable trust allows you to retain access to its holdings during your lifetime and then choose who will receive the remainder of the trust following your death. This can help you address children from multiple marriages or heirs with creditor problems. Additionally, beliefs can allow you to reduce estate taxes by transferring assets outside of your taxable estate.

In contrast, a will only take effect upon your death and must go through probate court. That can be a public process that can make your family’s finances vulnerable to prying eyes. Trusts, however, can keep your family’s financial affairs private.

To create trust, you work with an attorney to create a document laying out your wishes for distributing specific assets. You then appoint a responsible individual or firm to act as the trustee, holding and managing the assets by your trust’s terms. You can also designate a successor trustee to take over the role if your chosen trustee is unable or unwilling to carry out your instructions. This allows you to ensure that your trust’s trustee acts on your behalf and in your best interests.

Taxes

That income is taxable if a trust earns income, such as rent, interest, dividends, capital gains or proceeds from the sale of assets. The amount taxable to beneficiaries is limited to their distributable net income (DNI). Beneficiaries may take eligible tax deductions and get preferential treatment for capital gains. The trustee of a taxable trust must file an annual tax return and pay taxes, just like an individual. This includes federal, state and local income taxes. Most states impose income taxes on non-grantor trusts. In addition, some states impose estate or transfer taxes on trusts and their beneficiaries. Trusts provide greater flexibility for managing the distribution of unique assets. For example, a revocable trust can control the distribution of unusual assets such as mineral rights, oil and gas interests and timeshares, which might otherwise require costly appraisals to value. A trust may also be a better option for managing the distribution of assets that must pass through a beneficiary designation, such as retirement accounts and life insurance policies. She adds that this process can be streamlined and managed through a trust, eliminating the need for probate. A will, however, can’t control these assets as easily.

Distribution

Both a will and trust allow you to name beneficiaries for property, specify a guardian for minor children and nominate an executor. Will can also include specific instructions about charitable donations and other aspects of an estate’s distribution. The main difference is that a will takes effect after death, while a trust can go into effect as soon as it’s signed and funded. This can simplify things for those close to you because the process can begin while you live.

In addition, because a trust is a separate legal entity, assets in the trust can generally avoid probate, which can be costly and time-consuming. This can help minimize the amount subject to state and federal taxes, such as inheritance and gift tax. A trust also allows you to transfer property and assets while alive, which can be useful in many situations. For instance, if someone you care about has an addiction or health issues that could impact their ability to manage money, you can put funds in a trust to ensure they’re used responsibly by a trusted loved one or professional. A trust can be more complex to set up and maintain than a will, which must be updated as you acquire new property. Schwab advisors can help you decide whether a will or trust is best for your situation and guide transferring assets in compliance with the law.

Administration

If you want to leave your assets to beneficiaries in the form of a trust, you must transfer those assets into the trust. This is a process that can be simple or complex, depending on the nature of the property. Items like bank accounts can be transferred quickly, while other properties may need to change their title to a trusted name. Trusts also require ongoing maintenance. In addition to transferring property into the trust, you should add new properties as you acquire them and review the terms of the trust regularly. Unlike a will, which only comes into effect upon your death, a trust can take effect as soon as it is signed.

Additionally, the contents of a trust can be distributed to beneficiaries without going through probate court, which saves heirs time and money. Trust proceedings are also private, while a will is a public record. A will is a basic estate planning tool that can help distribute assets but cannot cover all situations. To have the greatest impact, your estate plan should include other devices, such as a power of attorney arrangement and medical directives. By examining your situation and goals, you can decide to satisfy your needs best.