Planning Your Retirement? Here's An Easy Trust Vs. Will Breakdown To Help You Prepare

Do you ever find yourself asking, Am I prepared to retire? If you haven’t, you’re not alone. According to a 2017 survey more than half of the adults surveyed said they didn’t write a will. In fact, only 42 percent of respondents had estate planning documents, like a will or a trust, in place. And it seems the younger you are, the least you’re prepared. The biggest reason behind the delay? Procrastination. And perhaps also fear. No one wants to think about their death, especially an untimely one that leaves behind young children. But it’s a reality better faced head on, especially if children are involved.

While figuring out retirement paperwork, like what is an annuity, the difference between a will and a trust, how to work a retirement planning calculator, or how a trust actually works can get pretty boring and tedious fast, planning for retirement is key. Don’t let yourself be bogged down by legalese and industry jargon. Getting ahead of a will will not only give you peace of mind that your wishes will be carried out once you pass, but it will also ensure your loved ones, like your children, are well provided for after your death. If you need a little refresher on this facet of planning for retirement, here’s what you need to know.

What is the difference between a will and a trust?

So you’ve heard the terms “will” and “trust” before but what’s the difference between them? While both are legal documents that work together in order to figure out your estate plan, the two have different purposes. The main difference between a will and a trust is that a will goes into effect only after you die, while a trust goes into effect as soon as you create it. A will is a document that directs who will receive your property, including possessions, as well as the care of any minor children at the time of your death. Additionally a will appoints a legal representative (an executor) to carry out your wishes that is stated within the document.

What is a trust, anyway?

A trust is basically like an estate transfer in which you give another party authority to look after your assets, including money and property, while you’re living and after your death. However, there are cases in which you can appoint yourself as your own trustee. In that case, either upon your death or if you’ve been rendered incapable of looking after the trust, you can include a successor to your trust who can distribute your property and assets when you die, thus acting like a will. A will appoints an executor(s) who manages and distributes property only when someone dies and therefore doesn’t possess any powers to control your property while you’re still alive unlike a trust.

How does a trust work?

In the simplest terms, a trust works like this: you (the settler) gives permission to another person (trustee) to rule over your estate for the benefit of a third person (beneficiary). Why would you do this? In most cases you’ll want to set up a trust to help manage your assets, particularly if your beneficiaries don’t have the capability or desire to — or if you don’t trust that they will do so respectfully. You might also want to set up a trust in order to protect your assets. For example, you might want to protect them from creditors, a pricey divorce, or any beneficiary who might not have your best interests at heart. It’s also possible to use your trust for tax exemptions for some of your assets. A trust also provides privacy. In many cases, your will is likely to be probated, which means it will become a public document. However, a trust document remains confidential and private unless it’s contested.

How much money do I need to start a trust?

It’s not quite about how much money you have but how much you want to tie up in a trust. According to CNN, this is a good rule of thumb on whether a trust is right for you: “If you have a net worth of at least $100,000 and have a substantial amount of assets in real estate, or have very specific instructions on how and when you want your estate to be distributed among your heirs after you die, then a trust could be for you. Trusts are also great for minimizing estate taxes or protecting your estate from lawsuits and creditors.”

What is an irrevocable living trust?

An irrevocable living trust is one that generally cannot be amended, modified, or revoked after it is created. So, essentially, the terms of the agreements are set in stone and can’t be changed except under very rare circumstances.

Modifications to an irrevocable living trust can only take place in court with orders following judicial review, making it costly and cumbersome. Per The Balance, changes to this type of trust can happen “if circumstances have changed and made the administration of an irrevocable trust unreasonably expensive or if its purpose has become outdated, the trustee and/or the trust beneficiaries can request that the terms of the trust be modified or that the trust be completely terminated through mutual agreement or judicial modification.”

What is a revocable living trust and what assets should you not include in it?

While an irrevocable living trust cannot be amended after its creation, a revocable living trust, you guessed it, can be changed as the circumstances change during the lifetime of the trustee. According to the folks over at The Balance, there are some assets that should not be included in a living trust, including but not limited to: certain retirement accounts, health and medical savings accounts, uniform transfers and gifts to minors, life insurance, and motor vehicles. Speak with your estate planning attorney on the pros and cons of each as they can best advise you on your particular state’s laws.

Will versus trust: what is right for you?

While both legal documents are beneficial and hold similar objectives, it’s key to understand which one will work best for you. You will want to understand the advantages of having a trust and decide whether or not it will truly work for your assets. Trusts typically include high costs for legal and tax advice with annual tax filings, and not every asset can be contained within a trust. Which is why not everyone needs a trust but everyone needs a will.