Will vs. Trust: Which is Right for You?

Put simply, a will is a legal document that details who will inherit or have the right to your property after you die. A trust is a legal structure that allows a person (the grantor or trustor) to transfer their assets to a trustee, who manages and distributes them according to the owner’s wishes.

A will only work after someone dies, but trust can serve both while the person is alive and after death. Wills and trusts can help you plan your estate and avoid legal disputes. Thus, understanding the differences between wills and trusts is essential.

Will vs. Trust: Key Differences

Knowing the difference between wills and trusts is very important when making your succession plan. The following are six significant differences:

• Time of Activation: A trust becomes immediately effective upon creation and funding, unlike a will, which becomes active only upon your demise.
• Probate Process: Wills typically undergo probate, a public and time-consuming court-supervised procedure. On the other hand, trusts often avoid probate, enabling quicker and more discreet wealth transfer.
• Privacy: When a will goes through probate, it becomes a public record. Trusts protect privacy because they don’t have to go through probate proceedings.
• Management of Assets Throughout Life: Wills do not address property management during one’s lifetime. Trusts manage and distribute one’s assets while one is alive, safeguarding one’s loved ones if one becomes unable to do so.
• Cost and Complexity: Making a will is usually easier and costs less. Trusts may be more complicated and expensive, but they can save money by avoiding probate.
• Asset Management During Incapacity: Since a will only takes effect after death, it does not manage your assets if you become incapacitated. A trust can include guidelines for managing your assets when you cannot.
• Flexibility and Control Over Asset Distribution: A will distributes assets after death, but it is final, limiting flexibility. The distribution of your assets is more flexible and under your control with a trust.
• Tax Implications: Wills transfer assets after death without modifying tax implications during the grantor’s lifetime; therefore, they don’t provide immediate tax benefits. Irrevocable trusts may lower estate taxes and protect beneficiaries by removing assets from the grantor’s inheritance.

Anyone thinking about estate planning has to understand the will and trust debate. Whether you use a will, trust, or both depends on your personal situation, goals, and the complexity of your assets.

What is a Will?

A legal document known as a will outlines your intentions about distributing your assets, such as property and money, after your death. You need to follow the rules prevalent in your state of residence while preparing the will.

Probate is the legal procedure that follows a will to pay off debts and distribute assets before an estate transfers ownership. If you don’t leave a will, your property will be distributed according to your state’s laws. Moreover, the absence of a will could lead to legal disputes among your relatives.

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What is a Trust?

A trust authorizes a third party to manage and transfer your assets to a beneficiary. That third party, known as a trustee, must follow your instructions. Like an executor, a trustee can be a family member, close friend, or professional. Trusts are significant estate planning tools because they may continue after you die.

A lawyer will assist you in setting up the trust and transferring your assets to the trust as the grantor. The trustee is in charge of handling the assets, not owning them. The document includes the assets, names the trustee and beneficiary, and states the terms, notably when and how the assets will be divided and whether the trust can be dissolved. Revocable living trusts allow asset withdrawal, but irrevocable trusts do not.

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Types of Trusts

Knowing that different types of trusts can achieve various goals is essential when considering the will and trust options. The following are the four main types of trusts:

• Revocable Trust

A revocable trust, known as a living trust, is established while the owner is alive and allows for changes, cancellations, or updates at any time. The person who set up the trust still has power over its assets and can use, sell, or give them to someone else.

Since the trust can be revoked, it doesn’t protect assets from creditors but gives owners freedom and control while they are still alive. Assets in a revocable trust don’t go through probate, but they are still part of the owner’s taxable estate.

• Irrevocable Trust

Once set up, an irrevocable trust cannot be changed. The person who sets up the trust no longer has power over the assets put in it, and for tax reasons, those assets are no longer part of the grantor’s estate.

With this trust, you can protect your assets and save money on estate taxes. However, the donor can’t change the rules if they want to.

• Charitable Trust

Some irrevocable trusts support charity while earning money for their creators or beneficiaries with tax benefits. A charitable remainder trust is a permanent trust. It provides current income to the donor or non-charitable recipients.

It also offers a tax break based on the value of the assets at the time of donation. Charities receive the donated assets when the trust’s term ends. The term cannot be more than 20 years, or it depends on the life of any number of non-charitable recipients.

• Special Needs Trust

This type of trust is a legal arrangement. It enables individuals with disabilities to obtain funds for designated uses. They complete this without risking their eligibility for federal and state benefits, including Supplemental Security Income (SSI) and more.

Designating Beneficiaries

Other legal arrangements can simplify the process of transferring assets to heirs. For instance, naming relatives as the beneficiaries of retirement accounts or gifting money and items during one’s lifetime can facilitate this transfer. After a person’s death, these agreements enable the transfer of property without undergoing the probate process.

Will vs. Trust: Which is Best?

A will might be the best and least expensive option for small estates with simple, uncomplicated assets. If you have a trust but no will, there may be issues with assets that are not in the trust and are subject to the rules of intestacy. Both options may be suitable for larger and more complicated assets.

If you have a lot of assets that don’t go through probate, it’s still a good idea to have a well-written will. Wealthy people and those who prioritize privacy can benefit from using both a will and a trust. This combination enables quick asset transfers. It also protects sensitive information and avoids intestacy for estate assets not included in a trust or other arrangement.

The Bottom Line

Starting a plan for one’s estate sooner is better done well in advance. Knowing the will and trust choices guarantees that assets and possessions are distributed as planned, whether one uses wills, trusts, or both. Making a solid succession plan can help avoid legal disputes, saving time and money.

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