Wills and trusts are legal instruments used to manage and distribute a deceased person's assets. A will becomes valid only when its creator dies, and it is up to the executor--named by the creator of the will--to distribute the property in accordance with the terms of the will. In contrast, a trust can be established during the owner's lifetime or it can take effect after he dies. There are advantages to both documents, and an attorney should be consulted regarding either one.
In the majority of cases, assets--which may include investments, automobiles, real estate and personal property--will pass from a deceased person to her heirs by a will. If he died without a will--called dying "intestate"--his assets would go to his heirs as defined by the laws of the state in which he resided at the time of his death. An executor typically is named in the will to administer it, and it will be probated, meaning that it will be administered in accordance with the rules of the court. If the deceased person owned real estate in another state, her will must be probated in those states as well.
A living trust is established during the owner's lifetime, and property, such as stocks, bonds and cash, is administered by the trustee named in the document, typically the owner. If the owner becomes incapacitated, a follow-up trustee will continue to manage the property and will pay the bills and living expenses. The trustee will either continue managing the trust on behalf of the beneficiaries or distribute the assets according to the owner's wishes. Another option is to establish a trust that will be activated upon your death, and the assets will be "poured" into it by your will. Or the trust can be the beneficiary of your life insurance or retirement plans, and a trustee will administer the trust according to your wishes.
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A will that must be probated often is subject to costs that are set out by the laws of the state in which the deceased resided. If you wish to avoid probate over your property, you can establish a living trust during your lifetime and fund it with those assets, avoiding probate costs. Most people do not place everything they own into a living trust, so their wills distribute their remaining assets according to their wishes.
Tax Effect of a Trust
When you create a living trust, the assets it contains will still be considered yours and they will be included in your taxable estate when you die. However, trusts can be set up that will reduce the amount the estate will pay in estate taxes. For instance, if a living trust continues after the creator dies and the spouse has been named as the beneficiary, it's likely that estate tax on half of the amount he leaves in trust for the spouse will be deferred until the death of that spouse.
The costs involved in drawing up a will or a trust will depend on their complexity. However, wills tend to cost much less than trusts because they take less time. A simple will can cost as little as $100 to create, but a trust can cost $1,000 or more.
If you think you want a trust solely to avoid probate, you should weigh the costs of of both a will and a trust before you proceed. Have your lawyer give you an estimate of those charges before authorizing the work.