Deciding what will happen to your assets after you’re gone can be fairly complex. As you begin thinking about leaving your assets to individuals and organizations, you’ll see two key terms: trusts & estates. Each is a way of transferring assets to your beneficiaries, and each works differently. Understanding the terms can help you and your attorney decide which might be right for you.
What is an Estate?
What are the differences between trusts & estates? Well, first off, everything you own is considered to be your estate. In general, an estate will consist of property, vehicles, investments, bank accounts, life insurance, pensions, and the like. It’s important to note, though, that anything you hold jointly with another individual isn’t part of your estate. For example, if you own a home with your partner, that home automatically becomes the property of your partner. It’s not included in the estate. Moreover, anything you’ve already distributed or transferred to another person isn’t part of your estate either. The estate only involves everything that you own independently at the time of your death.
Another difference between trusts & estates? An estate is not a permanent entity. Once your assets have been distributed after your death, the estate no longer exists. After you’re gone, the distribution of your estate can take a few weeks, months, or sometimes years if there are disputes among the beneficiaries.
An estate is usually distributed in two ways. First, if you have a will, it will be distributed according to the terms of your will. If you don’t have a will, a probate court will determine how the assets are divided. This is known as dying intestate. In this case, the estate is distributed according to the probate laws of the state in which you currently reside, but in general, your assets usually go to the immediate next of kin, which is typically your partner followed by your children. If you have neither a partner nor children, it may go to your parents, followed by your extended family.
The probate court’s decisions, though, may not reflect what you actually hope happens to your assets. A will carries quite a bit of weight in court, thus creating one to carry out your wishes is an absolute must.
Whether you have a will or not, in Florida, before the estate can be distributed, a few administrative issues have to be resolved. Any debts or liens have to be paid. The estate tax must be paid. And all court costs and administrative fees must be paid.
In most cases, creditors and lien holders have the first claim on the assets of the deceased, and only after they have been paid, can the estate be distributed to the beneficiaries. Sometimes if there is no cash, this may involve selling off real estate. And if the creditors are owed more than the contents of the estate, the beneficiaries won’t inherit anything.
There are only a few real costs associated with your estate. Naturally, you’ll have to pay to have your will created. If you have an attorney handling the distribution of the estate, there will be attorney’s fees. If you have an additional executor, he or she will be paid for the estate too. This is the person who will be in charge of discharging all of your debts and distributing your assets. Should a probate court get involved, court costs, administrative fees, and attorney’s fees will all come from your estate as well.
What Is a Trust?
An important differentiator between trusts & estates is that a trust can be part of an estate. It is a legal entity that holds and transfers certain assets according to the stipulated conditions. If you create a trust, you’re considered the grantor. You establish the conditions on how and when the assets will be distributed to the beneficiaries.
A well-planned trust has many benefits. It helps you avoid probate, and it may lower your income taxes now. It can also help to protect your assets from creditors. Moreover, should you ever divorce your partner, it can protect your assets in that situation. It may also help to benefit your favorite charity, as you can leave a trust to a specific organization. More than that, though, if you have very young beneficiaries or individuals who are disabled, a trust is the ideal way to provide them with the funds they need.
It’s important to note, though, that once you create a trust, while you’ll still own the assets, it becomes wholly independent of you. The assets must stay in trust until the conditions you’ve stipulated have been met. Imagine, for example, you want to create a trust for your granddaughter to pay for college. You might create stipulations like she can’t access the money until she’s 18 and she must be enrolled full-time in a university to access the money. With those terms, the trustee wouldn’t be able to release the money until both conditions have been met.
Very much like an estate, any costs that incur are drawn up from the trust. Your trusts attorney will bill for his/her time and collect the money from the trust. If the attorney needs to hire an accountant to prepare the tax forms, this individual will also be paid from the trust.
Like a will, a trust can be set up when you are alive. But in a will, the assets are only distributed after the death of the decedent; whereas, with a trust, the beneficiary can receive the funds even while the grantor is living- this is also known as the living trust.
In the world of trusts & estates, a trust also survives the death of the grantor. However, the trust never becomes part of the estate but becomes a legal entity on its own. After the death of the grantor, the trust will continue to function until it runs out of assets or the terms say otherwise. For example, you might have stated that the trust should be dissolved after 25 years, and the rest of the remaining assets should be distributed to the named beneficiaries.
The vast majority of trusts created today are revocable trusts- that means you retain control over the trust and you can alter the stipulations or even cancel the trust at any time.
Some, though, are irrevocable trusts, and they work in the opposite way. In this situation, you don’t have control or the ability to change the trust in any way. Once an irrevocable trust has been created, the assets belong to the beneficiaries, but they still have to meet the stated requirements of the trust before they can access the funds.
Creating Your Final Plans
Though both estates and trusts function similarly, the distribution of the assets follows a very different path. In general, a trust is created so that it will distribute the assets over time according to set conditions and rules overseen by a trustee. An estate on the other hand is a temporary entity; it exists to make a one-time distribution of the assets after which it will no longer exist.
If you want to ensure your assets are appropriately distributed, you can make a will or create a trust. Work with an estate attorney who can answer all your questions about estates and trusts. The more you know about these two entities, the easier it will be to make an informed decision about your assets. To learn more, contact us today.