Both wills and trusts are used to ensure that, upon your death, your estate is distributed per your wishes. However, because both have to do with the distribution of assets, people often confuse the two. In reality, although they are related, wills and trusts are quite different in many ways and serve different purposes. A will only takes effect after you die while a trust takes effect the moment it is created. The decision to use one or the other, depends on your individual circumstances, and which form best suits your needs.
A will is a legal document that contains precise instructions as to how your assets are to be distributed after you die. In other words, you designate specific beneficiaries, which can be individuals or organizations, to receive specific items, or a designated sum of money, from your estate. You also choose an "executor"… a person who will carry out your wishes. Additionally, a will can be used to designate a guardian to look after your children if they are still minors when you die. Wills are legal documents and, as such, have to be signed and witnessed in compliance with the law. If it happens that one of your beneficiaries or relatives challenge the will, the court system will automatically handle the dispute.
On the less positive side, wills are subject to probate proceedings which is the legal process that decides if the will is genuine and allows the executors to administer the estate. The cost of probate varies from state to state and can run as much as 10% of the total value of the estate. Additionally, depending on how complicated the estate is and how much time it takes to sort out issues like taxes and unpaid debts, probate can take anywhere from several months to several years to complete. When comparing wills and trusts this is an important factor to consider.
A living trust is a popular alternative to the traditional will. As the name suggests, a living trust is a trust established while you are still alive, into which you will transfer most, or all, of your assets. It is a legal arrangement in which one person, called a trustee, legally holds property for another person, or persons, who are the beneficiaries. As with wills, the property can be money, stocks, and bonds, real estate, personal possessions, etc. An added advantage to a living trust is that the trust will manage your financial affairs should you become incapacitated in any way.
While living trusts are more expensive to prepare and maintain, they are not subject to probate proceedings. They avoid having the estate decreased in value by high taxes and never become part of the public record.
Dying Without Wills and Trusts
It is extremely unwise to not be prepared simply because, should you die intestate, that is without a will or trust, the state will distribute your property to your spouse and closest heirs, which may not have been what you intended. Additionally, if you do not designate a legal guardian for your minor children, the state will appoint one that you may not have approved of, or trusted, at all.