Wills vs. trusts. Which one is better? Since my wife and I are still young, this isn’t the first subject on our minds, but lately, our debts have been dwindling and our assets have been growing (it’s an awesome feeling by the way!). We finally have a net worth that isn’t negative, and we’re beginning to ask ourselves what will happen to it if we have an unfortunate accident?
I have to admit that I did not know much about the topic of wills vs. trusts a few weeks ago. It’s something that I sort of stumbled on in my financial studies (I often go to the library for financial inspiration). But, these are the two most popular methods of leaving an inheritance to an heir or loved one in the event of a fatal accident.
What is a Revocable Living Trust?
A revocable living trust is an agreement that names someone to be responsible for managing property for the benefit of others. While you are alive, you typically designate yourself as the “trustee”, or the manager of the property, and the beneficiary would be the individual that will gain control of your assets upon your death. This set-up sounds a lot like a will doesn’t it? But just wait, there are some great benefits to a trust.
What is a Will?
A will is the legal instrument that allows individuals (and couples of course) to make decisions on how their estate will be managed after their death.
Positives and Negatives – via a real life scenario
I recently heard a story about a man and woman who were married and had three children. The woman, Betty, was diagnosed with breast cancer and was not expected to live long. Since she was still fairly young, she had never considered putting together a will, but now it seemed foolish not to. As expected, she decided to leave the house to her husband (it was currently in her name only, just as it was when they had met) as well as many other personal possessions.
Sadly, Betty lost her battle with cancer and passed away. Her will had indeed left the house to her husband, Frank, but there was a problem. Since the will is considered a legal document, it needed to be passed through the courts before any possession was legally passed on to its beneficiary. And, with the court comes probate fees. Since the house was worth $300,000, and the probate fees are a standard 5% (for most states), Frank had to pay $15,000 in order to rightfully own the house that he had been living in for years! If he could not pay the $15,000, then the house would likely need to be sold to cover the costs.
Also, it often takes quite a long time for the courts to process a will – normally between 6 months and 2 years!
Now, if Betty had set up a trust with her husband as the successor (or beneficiary), it would not have needed to go through the court system (which means no $15,000 fee) and the house would have automatically been Frank’s.
Sound to good to be true? It isn’t. There are some negatives to trusts though.
You must be careful if you decide to name a trustee that is someone other than yourself. A trustee has full power of anything listed in the trust even while you’re still alive!
Also, setting up a trust with a professional can be expensive. It can often cost between $1,000 to $3,000 to set up. However, if you are good with paperwork, this is easy to get around. I would suggest buying a computer program for $20 and forming one yourself. If you do this though, make sure to have a qualified attorney look it over to make sure it was done correctly. This method will only cost you a few hundred bucks.
Trust vs. a Will? Go with the Trust
A will can be expensive, time consuming, and complicated. The only reason it is still popular today is because it’s the way we’ve passed on our possessions for years!
The trust, in my opinion, is the best way to go. If set up correctly, it eliminates headaches and saves the beneficiaries from large probate expenses.
Have you had any experiences with trusts or wills? What was the good and the bad of your experience?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.