Wills and trusts are two different types of estate-planning tools that are sometimes confused. While both of these documents can be used to transfer assets, they function in very different manners. There are also several different types of trusts that can be created. What you choose to include in your estate planning may depend on your individual goals and circumstances. The professionals at Elder Care Direction can help you to understand the different options that are available and help you to determine which type might be best for you.
Living trust types
Different types of trusts offer different types of protection. You can create a trust that can solve almost any type of issue that you might want to address, but trusts generally fall into three main categories.
The most common type of trust that people create is a revocable living trust. The person who creates and funds the trust normally chooses to serve as the trustee while he or she is still alive. The grantor is able to change the trust’s terms, modify them and move assets in and out of the trust whenever he or she wants.
You can also create an irrevocable living trust. This type of trust lasts forever. Whenever you fund it and place your property into an irrevocable living trust, you no longer own the property. Someone else who acts as the trustee will have control over the assets held by the trust. While you can draw an income from the trust during your lifetime, you will not be able to change the trust, remove assets from its ownership or revoke it. Irrevocable trusts offer some benefits and tax implications that can help people who have high net worth.
The final main category of trusts is a testamentary trust. These are created as provisions that are contained in wills. They do not come into existence until after you pass away. The executor that you name in your will would be responsible to create the testamentary trust during the probate process.
When trusts and wills take effect
If you write a will, it will not go into effect until after you die. If you write a living will, it will be effective as soon as you sign it. You are able to change the terms of your will or of your revocable living trust until you die as long as you continue to be mentally competent. Typically, people who establish revocable living trusts name someone to serve as a successor trustee. Your successor trustee would have the responsibility of managing your trust after you die.
What property will your plan cover?
Wills only include the property that was owned solely by you at the time of your death. This includes property interests that you might have such as a tenancy in common. Wills do not address assets that are directly passed to a beneficiary by operation of law or by contracts such as joint tenancies with the right of survivorship or life insurance policies.
Living trusts are able to distribute property with which they have been funded. You transfer your assets into a living trust after it has been formed. Trusts can include life insurance policies if the trust owns the policy rather than you.
Assets that are passed by wills require the probate process to complete the legal transfer. In addition to wills, property that will be directed to be included in a testamentary trust will also have to be probated.
When wills are filed with the court for the probate process, they become matters of public record. By contrast, living trusts stay private. Property that is passed by revocable and irrevocable living trusts do not have to go through the probate process.
Trusts can continue to keep assets to benefit the beneficiaries after the grantors die. These beneficiaries might include spendthrifts or children who are unable to take legal ownership until they reach age 18.
Trusts work for life and death
Wills don’t go into effect until after you die and do nothing to help to plan for a mental disability. You are able to write provisions for incapacitation into the terms of your revocable living trust, however.
Wills and trusts may be created to address different needs. The estate-planning documents that might best meet your needs will depend on multiple factors. To learn more about wills and trusts and the benefits that they can offer, call Elder Care Direction to schedule your consultation.