You may be wondering whether to use a will or trust in passing along your assets. There’s a common belief that using a trust can give you a break on estate taxes, but it’s not necessarily the case.
What are the significant differences between these two documents that can save you time, money and headaches?
A trust is a pool of assets held for the benefit of a third party called a beneficiary. A trustee oversees the trust’s disposition to the beneficiary. You can create a trust by establishing one in your will or while you are still alive — a living trust. The property in a trust remains in the trust until some specified event occurs — your death or the beneficiary reaching a certain age.
When you create a trust, you are the settlor; if you create a living trust, you also can be the trustee.
- Using a living trust allows you to pass your property to your heirs without going through probate, which means faster distribution, especially in states with complex probate codes. A trust maintains the privacy of your estate. If you have property in multiple states, a trust passes the assets without additional proceedings. Trust documents are effective immediately, so you can include things like end-of-life directives and who should act as your guardian if you’re incapacitated.
- A trust is more efficient than a will; after the settlor passes away, the trustee executes the trust and disposes of the trust assets as set forth in the trust.
- A trust gives you control over how the beneficiary receives the assets.
- You can set up a trust for specific purposes — such as to pay for a child’s education or to provide donations to a charitable organization.
- The biggest difficulty with trusts is getting them set up. Trusts generally have higher preparation costs than do wills and require you to retitle your assets in the name of the trust, which takes time and money. If you don’t retitle your assets, those assets won’t pass through the trust and instead will go through probate. Trusts don’t offer special estate tax benefits. Your creditors can still get assets in your revocable trust.
Wills: Pros and cons
A will is a legally binding declaration by a person called the testator that stipulates that after your death the estate will distribute assets in a specific way.
- A will is low cost; once you’ve signed it and executed it, you don’t need to do anything else unless you want to make changes in the future.
- Revoking a will is simpler and easier than is revoking a trust.
- Wills involve probate court and the occasional long, drawn-out battle.
- Wills are usually public after you die, so everyone will know how you left your estate.
- You may need to go through ancillary probate proceedings in other states if you have property in multiple states.
Many different types of trusts and wills are available. Which one you choose will depend on your particular circumstances and tax status. Some helpful information can also be found in the Illinois Trust Code.
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