Trusts were first used in medieval England, and they have evolved to serve many purposes in modern law.
The essential attribute of a trust is that it divides ownership of property into two pieces. One person, the trustee, holds the legal aspects of ownership and may control and take responsibility for the property. Another person, the beneficiary, holds the sole right to enjoyment of the property.
Perhaps the most popular image associated with trusts is the "trust fund baby," usually portrayed negatively as a spoiled young adult who has always had everything provided without any work or effort on his or her part. Despite this unfortunate image, though, trusts play an essential part in many estate plans. They're often preferable to wills in ensuring the orderly transfer of property at death.
Trusts have the following advantages over wills:
- Trusts can take effect immediately, and therefore can handle a number of circumstances during your lifetime that wills cannot. For instance, if you are seriously injured, a trustee may take over your finances until you are able to assume responsibility again.
- Assets that pass through trusts are generally not subject to probate proceedings; unnecessary delay, expense, and publicity can thus be avoided.
- One can usually change a trust without the formalities required for altering a will.
- Under certain circumstances, one can use trusts to obtain favorable tax treatment.
Trusts also have some disadvantages:
- Trusts are often more complicated to draft than a will. A poorly drafted trust can be nearly impossible to execute.
- To put your assets into a trust, you must make sure you change the legal name on the account to the trust's name. Failing to do so may negate many of the benefits of having the trust.
- Appointing a guardian is traditionally done in a will. While there may be no legal requirement that a will be used to name a guardian, courts in your jurisdiction may be more comfortable with seeing the appointment in a will.
- Many professionals charge more in upfront fees to draft a trust.
Unfortunately, it may not always be easy to determine when a trust is better than a will. Only by taking a hard look at all of the factors that affect you and your finances can you make an informed choice about which will help you more. No matter what you decide, remember that understanding your estate plan is essential to making sure that you will achieve your goals.
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This article, written by Dan Caplinger, was originally published on June 2, 2006. It has been updated by Dayana Yochim, who is the author of The Motley Fool's Guide to Couples & Cash. The Fool has a disclosure policy.