Many people begin planning on what to do with their estate after they pass away. They have various means of doing so, but two common tools are a trust and will. A trust may seem similar to a will, but it is a separate document. Both of them have their uses, but they each come with advantages and disadvantages.
Anyone can utilize a trust or a will in their estate planning. It is necessary to know the differences, so you can discover the right option for your situation.
What Is a Will?
A will is a legal document that carries out the distribution of a person’s wealth, property, and the care of any minor children. It clearly establishes who gets what assets. Wills help make the process of settling your affairs easier after you pass away. Without one, your loved ones could end up spending more time and money.
The most common type of will is a testamentary will. A testamentary will is a written document you sign in the presence of witnesses. It is the most effective way to ensure your wishes get carried out. While you can write one yourself, an estate planning attorney can help prepare and review your will.
The Types of Wills
You can choose to use one of several other types of wills, but they are different when it comes to levels of recognition. They include:
- Holographic wills. Holographic wills are documents you write and sign but do not need witnesses or a notary. You might choose this option when time is short, as well as no available witnesses are around. For example, when you are in a life-threatening situation. North Carolina may recognize holographic wills if they meet a strict requirement.
- Pour-over wills. A pour-over will generally works together with a trust. It acts as a backup and covers assets a person did not put into a trust at the time of death. A pour-over will also protects a trust against any legal issues that arise.
- Mutual wills. A mutual will is a legal document between a married or committed couple. If one partner dies, the other is obligated to carry out the terms. It ensures any children receive assets instead of a new spouse if the living party remarries. A couple needs to sign in front of at least two witnesses.
- Oral wills. Also called nuncupative wills, oral wills are the least widely recognized category. Instead of a written record, you would verbally tell witnesses how you want your assets divided up. With certain restrictions, North Carolina may recognize an oral will.
What Is a Trust?
A trust is different from a will in that it establishes a fiduciary relationship. You would give another party explicit permission to manage your property or assets for the benefit of any beneficiaries. It can reduce paperwork and provide legal protection for your assets. A person can determine how money gets distributed while that person is alive or after death.
The Types of Trusts
An aspect of trusts is that they are highly flexible and can serve a wide variety of functions and achieve different goals. You can alter the terms of some of them, but others are permanent. Overall, the document may fall under one of two broad categories. They are:
- Testamentary trust. A testamentary trust gets established per a last will and testament. It tends to be more expensive to create and maintain compared to wills. Some people refer to the document as a will trust, and appointing a trustee with a declaration of trust provides the basic terms.
- Living trust. A person would create a living trust during their lifetime. You would designate a trustee to handle money and property for the beneficiary. You still maintain control of your assets while you are alive. You can make alterations to a living trust as well. Living trusts can be either revocable or irrevocable.
A trust needs to establish a trustor, trustee, successor trustee, and beneficiary to be valid.
Wills vs. Trusts in Estate Planning
Both trusts and wills are helpful tools when it comes time to transfer someone’s estate. A living trust can manage properties, but it only handles the assets you place into it. If you actively manage your estate planning, then a trust might be a more suitable option. A person can revise any will while still alive, but the document can get challenged in court.
Another consideration when it comes to choosing between a will and a trust is the probate court. Probate is when a court distributes an individual’s assets. Unless it is a retirement account or other accounts with stated beneficiaries or assets held in joint tenancy with rights of survivorship, wills are required to go through the process.
Probate can take time and money to complete. A trust does not have to go through the probate court and streamlines the process of transferring an estate. Your loved ones can avoid spending months settling affairs. While wills become public records, a trust remains private.
When it comes to minor children, a guardian protects them and their inheritance. You would use a will for this part of estate planning.
Trusts offer tax planning opportunities and can reduce the estate or death tax. The tax applies to an estate of a recently deceased loved one before money transfers to any heirs. Friends and living relatives may face two types of taxes. One on the federal level and one on the state level. Some states like North Carolina do not have estate taxes, but federal taxes may still apply. Trusts can help reduce them.
Our North Carolina Estate Planning Attorneys Can Help
Everyone can benefit from a will, but they do not always need a trust. Sometimes, having both documents can be helpful. Generally, the two of them do not conflict with each other. In some ways, a will is better for specific areas of estate planning. A trust can be effective in other aspects of planning.
To know which document is best for you, you will need to review your current situation, goals, and state laws. Our estate planning team here at McCollum Law can assist you in coming up with a strategy – contact us today to schedule a consultation!