What Is the Difference Between a Trust and an Estate?

Death can be a difficult reality to face not because of death itself, but because of the knowledge of how it may impact those we leave behind. Throughout our lives, we build relationships, create families, and acquire assets that make life feel more fulfilling. Knowing that our collective assets can help to take care of our families after we are gone can bring us comfort. Two of the ways in which people do that are through trusts and estates. These two legal structures are the primary way of transferring assets to heirs and beneficiaries.

An estate establishes a one-time transfer after a person dies, whereas a trust establishes a continuous transfer that can begin before or after a person’s death.

What Is an Estate?

An estate consists of everything a person owns. Among other possessions, this includes:

• Property
• Cars
• Bank accounts
• Investments
• Insurance policies
• Jewelry
• Furniture

An estate plan establishes how these assets are to be distributed in the event of your death or incapacitation.

In properly designed estate plans, your personal and financial wishes are carried out to your specifications. Within these plans, there are often guidelines that establish what should happen if you become medically incapacitated. The legality of an estate enacts the directives on a one-time basis. However, a person’s assets may be carried on for generations after their death.

What Is a Trust?

A trust, like an estate plan, establishes the directive for how your assets should be distributed. However, in a trust, there is a trustee who is responsible for this distribution. It also establishes the timeline for which the dissemination of assets should occur, which can begin prior to a person’s death.

There are many types of trusts that California recognizes, and each serves a different purpose. Knowing the types of trusts and the purposes of each can help you to select the one that serves your interests best:

• Revocable trust. Under this type of trust, modifications and cancellations may be made up until the trustor’s death. Selecting this type of trust is ideal for when a person consistently updates changes in assets.
• Irrevocable trust. In this trust, once a trustor has established the guidelines, there can be no modifications or cancellations.
• Asset protection trust. If a person has a lot of debt, they may wish to establish this type of trust which can help them protect their assets from creditors in the event of their death.
• Spendthrift trust. This is similar to an asset protection trust, but instead of protecting assets from the trustor’s creditors, it protects the inherited assets from the trustee’s creditors.
• Special needs trust. Because there are circumstances that can impact those with special needs, this type of trust allows a person with special needs to inherit the trust without impacting their Social Security benefits.
• Charitable trust. Often used to reduce tax liabilities for the wealthy, this allows a trustor to benefit charitable organizations through their trust.

Creating a Trust

Trusts can be complicated to establish. Because they do not require the oversight of a court system, they need to be comprehensive and legally binding to be sure the wishes of the trustor are honored. When establishing a trust, three major components should be considered:

1. A full inventory of assets should be done before creating a trust. This provides a clear picture of what assets need to be distributed and to whom they will go.
2. Establish a trustee. This person is the one who will ensure your assets are distributed in the way you wish. The trustee becomes your voice in the event of your death or medical incapacitation. Their role includes funeral arrangements, tax settlements, and asset distribution.
3. Decide which, if any, charitable organizations may benefit from your assets.

FAQs

Q: What Are the Disadvantages of a Trust?

A: Trusts may seem simple and straightforward on the surface, but they are much more complicated than you may think. Because trusts are administered without court oversight, there are many complexities that must be spelled out in the terminology. Established trusts can become very lengthy and full of complicated legal terms that are necessary to protect both the executor of the trust and the trustee. Improper trusts can lead to legal battles.

Q: Is a Trust the Same as an Estate?

A: No. A trust is a structured release of certain assets that is ongoing and can begin before or after a person’s death. An estate is the encompassing of everything that a person owns, minus anything that is jointly owned or transferred by the time of death, that is distributed in a one-time transaction to the designated beneficiaries.

Q: What Are the 3 Most Common Types of Trusts?

A: The three most common types of trust are revocable trusts, irrevocable trusts, and asset protection trusts. A revocable trust can be modified and canceled while you are still alive. An irrevocable trust cannot be modified or canceled once it is established. An asset protection trust is used to protect assets from potential creditors. There are other types of trusts as well, but these are the three you see most often.

Q: What Is the Difference Between a Trust and an Inheritance?

A: Trusts allow assets and property to be held for specified timeframes, sometimes indefinitely, for a beneficiary. An inheritance is an immediate transfer of property and assets to a beneficiary. In the case of a trust, the person who owns the property or assets may begin the benefits prior to their death. With an inheritance, the owner of the property and assets must pass before the beneficiary may receive them.

Planning for the Future

Planning what happens to your assets in the event of your death can be an overwhelming process that is full of careful planning. The legal protections that these decisions require certainly benefit from the help of an expert lawyer. When you face estate planning, contact Robert G. Petrovich, Attorney at Law. Our expert team is ready to help you carry out your wishes.