Wills and trusts are powerful tools within the estate planning arsenal. Deciding whether to go with a trust, will or both, depends on an individual’s goals and circumstance. Before deciding on which route to go, it’s important to first understand the major differences between the two. Let’s break it down.
What is it?
Both a will and a trust are legal tools that are used to dictate what should happen to a person’s estate (finances/property) in a specific circumstance, such as death or incapacity. The difference lies in how they carry out those wishes.
| A trust is when the grantor transfers the ownership of certain assets from themselves to the trust. The grantor then appoints a trustee, who oversees the management of the trust for the benefit of the beneficiary. Depending on the type of trust, the grantor, trustee and beneficiary can be the same person. |
Defining terminology of a trust:
- A grantor is the person who sets up the trust.
- A trustee is appointed by the grantor to manage the trust.
- A beneficiary is the person who receive the benefits of the property titled in the name of the trust.
There are two types of trusts – revocable and irrevocable. In a revocable trust the grantor retains the right to change or dissolve the trust. In contrast, in an irrevocable trust, once the grantor transfers their ownership of the property to the trust, they cannot change their mind and regain ownership or make decisions in regards to that property.
| A will is is a legal document that states your final wishes after you pass away. A will (or last will and testament) can define your wishes in regards to what you’d like to happen with your property and assets (including animals), who should look after any dependant children, how debt is to be paid, who should inherit what and your funerary wishes. |
Defining terminology of a will:
- A testator is the “will-maker”.
- An personal representative is appointed by the testator to manage the distribution of the assets, pay debts, and handle other administrative duties.
- A beneficiary is the person who benefits from inheriting items set forth in a will.
Major differences?
So how are trusts and wills different? Let’s see…
Probate. Unlike a will, a trust doesn’t have to go through probate. Probate is the legal process, where a court distributes your property after you die. A court decides how to distribute your property either through the instructions set forth in a will, or if a will was never made, then through Colorado’s intestacy laws, which dictate who inherits your estate. Some people prefer to avoid probate due to that fact that it takes time and money, and is also a matter of public record.
Time. A will only takes affect after the testator dies. Conversely, a trust becomes valid as soon as it is duly executed and assets are added. So unlike a will, a grantor can also act as the trustee and manage their assets while their still alive. A grantor can then appoint a trustee to manage the trust after they die.
Children. A will can appoint a guardian for dependent children, which a trust cannot.
When to choose a Trust
- When you want your beneficiaries to have immediate access to your estate after you die.
- If you want to protect the assets your children inherit from their creditors.
- Withhold inheritance until a beneficiary comes of age.
- Prevent your financial affairs from becoming public record.
- If your estate is valued over $5 million and you want to minimize estate taxes.
- If you have a dependent with special needs or a disability.
Other reasons to choose a trust:
- If you own multiple properties or have real estate investments out of state.
- If you think there is a good likelihood that your wishes will be contested by other family members after you die.
- If there is a possibility of incapacity.
- You want to make sure children from a previous marriage are taken care of.
When to choose a Will
- If you’re young and in good health.
- If your estate is of lower value.
- If you have dependent children and need to appoint a guardian should you be unable to care for them.
- Would like to dictate any funerary wishes.
Ideally, a person should have both a will and trust, or at the very least a last will and testament. While a will is generally less complicated to prepare and thus cheaper, the cost of setting up a trust is usually offset by its ability to avoid probate and the costs that go along with it. If you would like more information, please schedule a consultation with one of our Colorado estate planning attorneys