www.taxprofessionals.com - TaxProfessionals.com
Posted by Taxes Made EZ Inc

Estate VS. Trust: What’s the Difference?

Estate VS. Trust: What’s the Difference?

Estate and Trust are the two main legal structures for transferring assets to your heirs and beneficiaries. Each works in different critical ways. Estates make a single transfer of your assets upon death. Trusts, in turn, allow you to create a continuous transfer of assets before and after death. This is how each one works. Consider working with a financial advisor when assessing the relative merits of estates and funds.


What is an Estate?

An estate is all you have when you die. It does not include anything that is held jointly with someone else. It also does not include anything that you transferred or otherwise designated at the time of your death. Your heirs include anyone who receives money, assets, or other property from the estate.

So, for example, suppose John dies. The house that John and his wife had together is not part of his estate, as it now belongs only to his wife. John did not reveal anything as his death approached. Instead, John's estate would include everything John independently owned at the time of his death.

An estate is temporary. It is a unique distribution of the deceased's property. Once these assets are sold, the estate ceases to exist. However, this does not mean that an estate is necessarily short-lived. Some estates can take years if that is the time required to complete a final distribution of all assets.

An estate can be distributed in two ways: by will or by a legal chain of inheritance.

A will is a set of instructions on who should get the assets of a property and how those assets should be distributed. If the deceased (legal term for someone who died) has a valid will at the time of death, the inheritance is distributed under these conditions.

When an individual dies without a will, this is called a dying intestate. If so, your assets will be distributed in accordance with state law. In most cases, this means that the deceased's property goes directly to the next of kin. In most states in the U.S., spouses claim precedence in this line of inheritance, followed by children, then parents, then extended family.

One of the common misconceptions about an estate is how much control you have over the terms of your will. While different state law governs who inherits when someone dies on their behalf, most states have very few restrictions on how a person can distribute property by will. When you die, you are free to leave your belongings to whomever you want.

However, before anyone can inherit, however, an estate must fulfill three main obligations:

  • Estate tax;

  • Existing debts;

  • Fees, costs, and fines.

When a person dies, creditors and debt collectors are the first to claim ownership. The inheritance pays all the debts of the deceased before someone else can inherit. This can involve selling a property if the deceased does not have enough money to pay the bills. If these accounts are larger than the property itself, the heirs get nothing.

Additionally, when a person is rich enough, that person's wealth can generate dedicated property taxes.

An estate tax is assessed on the basis of the amount received by an heir and requires a high level of wealth. In general, for an individual, the estate tax only applies if you have inherited more than $11.18 million ($22.36 million for couples filing jointly). This includes the money and the value of any property or other asset. (For example, if you inherit $35 million in land, you have to pay estate tax for that inheritance.)

If taxes are levied on the estate, they will be paid by the estate itself.

Finally, some estates require monitoring and management. All associated fees and commissions are taken directly from the estate itself.

An estate can bear many different potential costs. For example, if a lawyer oversees the terms of a will, he or she will receive his or her legal fees directly from the estate. If an estate requires administration, someone can be appointed executor. The executor is the one whose task is to distribute the assets according to the will's instructions, pay the bills, and manage the distribution of the assets. Depending on the workload, the executor may charge the estate for his time. Or, if an estate is complex enough, a judge in a probate court can oversee the allocation of assets. Taxes and fees are deducted from the estate.

In other words, the cost of managing the estate is borne by the estate itself.


What is trust?

A trust is a legal entity that holds and distributes assets under certain conditions. The person who creates the trust called the “grantor,” can set these conditions at their discretion. A trust exists regardless of who created it and who receives funds from it. All assets belong to the trust itself until they are distributed. To build trust, you have to follow three basic steps.

  • First, as a grantor, create a resource pool.

  • Second, these assets are turned over to third parties for management and oversight. This third party is called “trustee(s).”

  • Third, it identifies people who can receive trust assets under certain conditions. These people are called “beneficiaries.”

For example, suppose John is a wealthy man and wants to provide an education for the next generation of his family. He can establish a relationship of trust in the following directions:

• As a donor, John would have contributed $10 million to an account.

• The account would be overseen by John's lawyer, who would act as administrator.

• All of John's children, grandchildren, and great-grandchildren are listed as beneficiaries. They can use the account to pay tuition fees at any college or university.

With that confidence, John's family members can now use the money to pay for school fees, but nothing more. John didn't just give them a lot of money. It has conditions. John's lawyer, as his attorney, is responsible for ensuring that beneficiaries meet these conditions. For example, it will be the lawyer’s job to make sure John's family members apply to real colleges and not just cheat to get a hold of their trust.

John's attorney, acting as a trustee, is also responsible for the trust's financial management. The attorney will oversee his investments, banking, and other administrative matters.

Like an estate, a trust incurs its own costs. The administrator, in our example, John's lawyer, will charge for his time. If he needs to hire accountants, researchers, or other related services, he will bill these costs to the trust as well.

Unlike an estate, you can create a trust even while you are alive. If John had written the $10 million grant in his will, none of his family would have received the tuition until after his death. By creating a trust, he has made sure that his heirs can receive the money even while he is still alive. This is called a living trust.

However, like an estate, a trust survives the death of its creator. When someone does this, the trust is not part of their estate. On the contrary, the trust is a legal entity in itself. When the grantor dies, the trust continues until the assets are exhausted, or its terms dictate otherwise. (For example, a trust might say, "after 30 years, dissolve the trust and distribute the remaining assets among the living beneficiaries.")

Living trusts are common ways for families to transfer land, inheritances, and other important assets. It allows the assets to belong to the general family, even if it is owned and used by only one person at a time. Living trusts also mean that assets can bypass inheritance court and even inheritance tax, depending on how the trust was set up.

Most trusts are called revocable trusts. This means that the grantor can control, modify, and even terminate the trust at any time. Ultimately, the person still owns the assets, and the trust only manages it for them.

An irrevocable trust is the reverse. In this configuration, the grantor cannot control, modify or terminate the terms of the trust. Once created, the trust is owned by its beneficiaries, although they must continue to meet its terms or conditions.

While estates and trusts both exist to distribute assets, they do so in very different ways. A trust can be created during the lifetime of the grantor, while an estate is created at the time of someone's death. A trust is designed as a semi-permanent entity. It exists to distribute assets over time according to a set of rules and conditions overseen by an administrator. An estate is temporary. It exists to perform a single asset allocation, after which it will cease to exist.

An estate exists whether you plan to have one or not. However, you can structure your estate by making a will, which determines who will receive your property and how. A relationship of trust must be created in a specific way. Once a trust is created, it also determines who gets their assets and how.


Bottom Line

Trust and estates are the two most common asset transfer mechanisms. An estate is everything you own at the time of your death and is passed on in a single distribution to your legal heirs. A trust is a legal entity that can exist for generations and allocates assets according to a set of rules and instructions.


FOR MORE INFORMATION ON HOW TAXES MADE EZ, INC. CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CLICK THE BLUE TAB ON THIS PAGE.


THANKS FOR VISITING.


Taxes Made EZ Inc
Contact Member