Few enjoy dwelling on their mortality, but if you handle your inheritance planning as soon as possible, chances are you won’t have to deal with it again unless it needs updating.
The only time things don’t turn out as planned is when someone fails to draw up an estate plan or doesn’t fully comprehend the difference between a will or a trust. Choosing a trust or a will comes down to your personal situation and what you hope to achieve with your estate plan. Having upfront knowledge about both can save you tons of time. Here are the main differences between the two and their differing advantages:
A Will
A will is a legal document explaining how you want your assets to be distributed after you pass away. It also gives you the opportunity to name guardians for any dependent children who will still be minors at your time of death. If your life should end before you’ve drawn up your will, the responsibility will fall on the courts to decide what happens to your assets. This is why it’s best to deal with estate planning as soon as possible.
Take heed; a will does not take precedence over beneficiary designations. This means when you assign someone as a beneficiary on an insurance policy or account, this individual will receive the relevant asset at the time of your death - even if you planned to leave the money to someone else and it’s clearly stipulated in your will. It’s crucial to check your beneficiary designations every so often to make sure your inheritance planning is in line with your current wishes.
The most important decision you have to make when compiling your will is to choose and name an executor. This is the person who will be responsible for managing your estate when you’re no longer there. They need to be trustworthy, willing to take on a large responsibility and capable of managing your finances on your behalf.
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A Trust
A trust suits those who want more control over the management of their assets and need to optimise the amount of tax their heirs will pay. Trusts are legal agreements where you set aside investments, cash or property for your heirs and assign the responsibility of their management to a third party i.e. a bank or law firm.
The third party is referred to as the ‘trustee’. One of the main advantages of opening a trust is that you can specify how and when your assets pass to your beneficiaries. Additionally, a trust also allows you to minimise gift and estate taxes. The disadvantage is that once you’ve established a trust, you relinquish control over your assets as well as the right to dissolve it.
The Main Differences
Before you decide which is preferable for your inheritance planning, there are some key differences we should clarify. The basic difference between a trust and will is that a will only covers property that is in your name, but a trust is inclusive of every single asset that you’ve stipulated should be part of it.
A trust allows you to choose when your assets are distributed meaning that you can pass them on while you’re still alive because it takes effect as soon as you establish it. The only setback is that living trusts are high maintenance and need to be regularly monitored.
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If you opt for a will, it has to pass through a probate, and the court will supervise the process of paying debts and bequeathing assets to the rightful heirs. This can be a costly process whereas a trust is private and doesn't go through the court. However, a trust does not allow you to name a guardian for your children or specify funeral arrangements.
The reality is everybody needs an estate plan that meets their legacy’s needs. Spending time researching and thinking about your legacy helps clarify which option suits your inheritance planning. For complete peace of mind, you will need to know how to protect your assets and what other factors you should consider when planning your estate.
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