Planning for the future can feel like accounting for the unknown, which can be overwhelming. Fortunately, trusts and estates are invaluable legal mechanisms that enable you to preserve, manage, and protect assets and property after death and take care of those who mean most to you when you are no longer around to do so personally.
Still, regardless of what avenue you take, the financial and legal complexity involved with both require consulting an estate planning attorney an expert CPA. Here is what to know about the differences between both:
What Is an Estate?
When examining the core differences between trusts and estates, you must understand what they are. An estate is composed of all property and assets you own upon your death. These can include:
- Real estate
- Bank accounts
- Portfolio investments
- A life insurance policy
- And more
However, your estate does not include property held jointly with someone else or anything one has transferred before dying. Leaving your estate without a plan is not estate planning – this occurs before a person passes away. All the items above are part of an estate and the only way to distribute them is through a will or trust.
With a will, you may still have to go through probate, meaning it must go to court. Without a will, your closest living relative get your assets and it might go to someone you don’t like.
Related Article: Probate: What Is It, and When Do You Need It?
What is a Trust?
When considering estates vs. trusts, trusts have a few key distinguishing features. Trusts are, ultimately, a form of estate planning.
A trust is an instrument that helps manage legal and financial aspects of an estate per certain conditions the trustor establishes. A trust exists independently from the person who created it, and any assets it contains belong to the trust until distribution.
A trust document designates a trustee responsible for distributing assets to beneficiaries. Still, trusts are often the main component of an adequate, comprehensive estate plan.
Several types of trusts are available, each serving a specific purpose per your circumstances. The two most common types are revocable trusts and irrevocable trusts.
Related Article: A Beginner’s Guide to Trusts and Trust Accounting
What Differentiates Trusts and Estates?
One core difference between estates vs. trusts is you don’t have to create an estate. Your estate automatically exists.
A trust is part of the estate planning process, and is a legal document that distributes assets and protects and manages your personal and financial affairs per your wishes and may involve writing a will. Estate planning can even include things like medical directives and power of attorney.
Establishing a trust requires financial planning, navigating a complex legal process, and maneuvering through ample legal red tape. Essentially, creating a trust requires four fundamental steps:
Because a trust survives its trustor’s death, it is an autonomous legal entity not considered part of the estate.
Related Article: What is the Difference Between a Trustee and Executor?
Trusts and estates are both means of distributing assets but differ in the mode of distribution.
One distinguishing characteristic of a trust is people can enact trusts while they are still alive and make arrangements to distribute assets while living. Trusts are one aspect of a comprehensive estate plan to preserve assets and ensure the estate stays out of probate.
Trusts can also extend into the future to distribute assets over time while adhering to timelines, conditions, and rules in the trust document. An estate, however, only activates when its owner dies. Estates activate on a one-time basis and distribute assets all at once.
Because they no longer exist after one-time distribution, estates are significantly shorter-lived, though this largely depends on how long it takes to distribute assets. Estates are distributed by a will or by state law.
Related Article: Our Guide to the Final Distribution of Estate Assets
Get Help Establishing and Administering Trusts and Estates Now
When discussing the differences between estates vs. trusts, one thing is certain: regardless of what legal instrument you use, an estate plan is critical to protecting and preserving your property and assets and providing those who mean the most to you with future security. If you are unsure of the best course of action for your circumstances, consulting with an estate planning attorney and an a specialized CPA is essential to review your estate and optimize decision-making.
Fortunately, with Marcia Campbell, you receive candid financial advice that always takes your well-being and that of those you love most into consideration. We can help ensure your estate is in good hands. Contact us with any questions to get started.