Will vs. Trust: What's the Difference?
Wills and trusts are both estate planning tools that can help ensure your assets are protected and bequeathed to your heirs, besides your spouse, which is generally not an issue. This is because the unlimited marital deduction provision within the United States Estate and Gift Tax Law allows the passing of wealth to a surviving spouse without incurring gift or estate tax liabilities.
However, the transfer process becomes much more involved when wealth is passed to a subsequent generation. It is possible to have both a will and a trust.
A will is a written document expressing a deceased person's wishes, from naming guardians of minor children to bequeathing objects and cash assets to friends, relatives, or charities. A will becomes active only after one's death. A trust is active the day you create it, and a grantor may list the distribution of assets before their death in it, unlike a will. There are irrevocable trusts, often created for tax purposes, which cannot be altered after their creation, and living trusts, which can be changed by the grantor.
All wills must go through a legal process called probate, where an authorized court administrator examines them. This process can be lengthy and potentially contentious if family members contest the will. Trusts are not required to go through probate when the grantor dies, and they cannot be contested.
For this article, we will examine how these estate planning tools can be used to provide for your heirs, including:
- Whether you need a will, a trust, or both
- The different types of trusts
- The advantages and disadvantages of wills and trusts
- Whether you choose a will or a trust, you should seek professional advisors' advice (tax, investment, and legal).
- Trusts offer more control of assets, but they are more expensive, tedious to set up, and actively managed.
- If you do not have an estate-transfer plan, the state you live in and the federal government will have one for you.
What Is a Will?
The most common type of will is called a testamentary will. It is a legally enforceable document stating how you want your affairs handled and assets distributed after you die. It can also include a directive of how you want your funeral or memorial held. A will is an important component of estate planning, and experts suggest seeking legal counsel.
What you can find in a will: a list of assets and debts, including any family heirlooms, the contents of safe deposit boxes, property, and vehicles. You can leave your possessions to heirs, friends, or charities.
A will can be effective in an estate transfer and other legal proceedings after death, but there are drawbacks that you should be aware of. Your estate will become part of the public record, for example, and anything left by a will must go through probate court. Also, probate attorneys can be expensive and cannot be avoided except in California and other specific states. Retirement accounts and life insurance policies pass straight to named beneficiaries do not go through the probate process.
If you die intestate (without a will), what happens to your property, bank accounts, securities, assets, and even the guardianship of your minor children will be determined based on the intestacy laws in your state. It can lead to long court battles and financial hardship for your loved ones.
Guardianship of Minor Children
If you have minor-aged children at home, it's important to have a will that appoints guardianship of your children. If a guardian is not appointed at the time of death, your surviving family will have to seek help in a probate court to have a guardian appointed for your children. The person appointed may not be one whom you would have wanted to be entrusted with your kids.
It would be best to consider how you will pass a portion of your estate to a minor child through a will. A will places your decisions in the hands of the judge presiding over your estate transfer. Your testamentary will carries out your wishes from beyond the grave. A will also allow you to give insight and direction over the handling of assets your beneficiaries will receive. Within reason, you can address how you would like them to use what you have left them.
While children (natural or adopted) have a statutory right to inherit, a will allows you to disinherit a child if you choose to do so (check your state laws for the specific details about this). A person can disinherit a spouse as well, under certain circumstances. However, you will need to be aware of the laws governing your state—whether it is a common-law state, a community property state, or an equitable distribution state; a person may only disinherit a spouse in a community property state. Each has a different set of stipulations on what and how much can be disinherited. Note, too, that a person can only disinherit a spouse or child through a will.
What if I Die Without a Will?
If you die without a will, called intestate, the state gets involved, and it will oversee the distribution of your assets. If you have minor children and die intestate, the court will appoint a guardian. Besides, the courts follow a set formula of how to divide assets, and it could result in actions that could negatively impact a surviving spouse or child.
A will protects survivors against estate tax liability as well. As of 2020, U.S. estate tax returns are required to be filed if your estate is valued at $11,580,000. If your estate is worth less than this figure, there is no tax return required, and you will not be charged an estate tax.
What Is a Trust?
A trust is another method of estate transfer—a fiduciary relationship in which you give another party authority to handle your assets for the benefit of a third party, your beneficiaries.
A trust can be created for a variety of functions, and there are many types of trusts. Overall, however, there are two categories: living and testamentary. A will can be used to create a testamentary trust. You can also create a trust for the primary purpose of avoiding probate court, called a revocable living trust.
Let's focus on a revocable living trust for estate transfer. Like a will, a trust will require you to transfer property after death to loved ones. It is called a living trust because it is created while the property owner, or trustor, is alive. It is revocable, as it may be changed during the life of the trustor. The trustor maintains ownership of the property held by the trust while the trustor is alive.
The trust becomes operational at the trustor’s death. Unlike a will, a living trust passes property outside of probate court. There are no court or attorney fees after the trust is established. Your property can be passed immediately and directly to your named beneficiaries.
Trusts tend to be more expensive than wills to create and maintain. A trustee will be named in the document to control the assets' distribution following the trustor's wishes, following the trust document and its mandates. This is also an effective way to control the passing of your estate beyond the grave.
To be valid, a trust must identify the following: the trustor, the trustee, the successor trustee, and the trust beneficiaries.
A declaration of trust will also provide the basic terms of the trust. Your estate stays private and passes directly to your heirs, you do not pay a probate attorney or court costs, and your loved ones may be able to avoid being tied up in probate court for what could be a year or more. From this planner’s perspective, trust can be a fantastic choice for estate transfer.
Trusts Could Keep Your Heirs Out of Probate Court
One-stop you should try to avoid on the estate-transfer train is probate court. This is where your heirs could spend months sorting out your estate if your transfer plans are not efficiently laid out. You could easily lose an additional 2-4% of your estate due to attorney fees and court costs.
Probate court is the judicial system section responsible for settling wills, trusts, conservatorships, and guardianships. After death, this court might examine your testamentary will, which is a legal document used to transfer your estate, appoint guardians for minor children, select will executors, and sometimes set up trusts for your survivors.
Your executor would still be responsible for sorting out the estate, which could take 6 to 18 months, depending on the intricacies. Imagine your eldest child spending the next year and a half traveling back and forth to court hearings when they should be mourning your passing. It doesn’t sound fun, but it’s a possibility if you haven't left a clear and well-drawn will and/or trust documents.
Key Differences Between Wills and Trusts
Wills and trusts are both important estate-planning tools, but they differ in important ways. First, a trust is activated when the grantor signs it. A will does not go into effect until the testator. Upon your death, your will goes through probate, and a trust does not. A will is where you name guardianship of any minor children, plus share any funeral or memorial plans or requests.
|Wills vs. Trusts|
|Trusts vs. Wills||Names Guardianship of Minor Children||Can be Challenged in Court||Probate Court||Rules Around Inheritance||Active on Signing||Can be Revised||Private or Public Record|
|Trusts||No||Not usually||No||Yes||Yes||Yes. If it is a revocable trust.||Private|
Wills and Trusts FAQs
What is Better, a Will, or a Trust?
A trust will streamline the process of transferring an estate after you die while avoiding a lengthy and potentially costly period of probate. However, if you have minor children, creating a will that names a guardian is critical to protecting both the minors and any inheritance. Deciding between a will or a trust is a personal choice, and some experts recommend having both. A will is typically less expensive and easier to set up than a trust, an expensive and often complex legal document.
Do You Need Both a Trust and a Will?
Nearly everyone should have a will, but not everyone most likely needs a living or irrevocable trust. If you have property and assets to place in a trust and have minor children, having both estate-planning vehicles might make sense.
Does a Will Override a Living Trust?
A will and a living trust are two separate legal documents. One doesn't usually trump another, but if the issue arises, a living trust will most likely override a will because a trust is its own entity.
How Much Does it Cost to Set Up a Trust?
The cost to set up a trust depends on various factors, including the type of trust, the state you live in, and how complex the legal document. A simple trust done online with LegalZoom costs less than $300, but an estate planning attorney will most likely charge more.
The Bottom Line
It is important to settle your affairs earlier rather than later in life. A will or a trust, or both, can ensure your assets and possessions end up where you want them to go. If you have minor children, you should absolutely make a will to name guardianship. A trust will streamline your estate's transfer, unlike a will, which goes through probate. Making an estate plan a priority now can save money and precious time later, and help your loved ones avoid potential financial hardship.