When it comes to the death of a loved one, it can be difficult to understand what is going to take place with their property and how to count it when paying taxes. It’s difficult understanding the differences between a will and a trust. The difference between wills and trust from a tax standpoint varies from state to state, and we want to help you understand those differences.
Understanding the Differences Between a Will and a Trust
A will is first and foremost a legal document in which the person writing it can dictate what happens to their person and to their belongings after they pass away. You can use a will to leave property, money or even instructions on your end-of-life arrangements. A will generally leaves a sum of money or property to an individual or to several individuals, and they are in charge of the funds and the property from that point on.
A trust is similar, but not entirely the same. With a trust, the person writing the trust leaves one person, named a trustee, the ability and the right to hold, manage and dispense assets for another person. A good example might be a parent that has a great deal of wealth or property. They pass away and want to leave said property and wealth to their children. The problem is, their children are underage. The person can create a trust where a trustee can then use the money to care for the children until a time when the money can be released to them fully.
The Difference Between Wills and Trusts From a Tax Standpoint
The first difference is that a trust agreement is going to stay private whereas a will is going to be made public. Another difference is that a trust is going to minimize the amount of taxes that you have to pay on the money or the assets being distributed. Instead of them all being paid out to one person. With a will, the full sum or the properties are paid out immediately, and they are going to incur larger taxes.
With a trust, you are going to be able to spread out who gets what and are going to be able to make larger disbursements to people that have a lower tax bracket and therefore are going to pay less in taxes. With a will, you are not going to be able to move the assets around, and you are not going to be able to make changes and decisions that minimize how much you are going to pay in taxes.
If you have any questions about what is going to work best for you and for your family, it is always best to discuss with an estate planner what works. They can help you determine what is going to work best for the assets that you have, for the people you are leaving behind, and for the tax considerations you need to make.