Preparing an estate plan for managing and distributing your assets in the case of death is one of the most important steps you could take to protect and provide for loved ones.
However, an estate plan comes in more than one shape. One of the decisions you might need to make is whether to use a trust versus a will, as both give you control over what happens to your assets. However, a trust and a will have several differences between them.
Let’s explore how they work and the main differences between a trust versus a will to help you decide between them.
Trust vs. will
Although both trusts and wills give you the ability to pass on your assets to people you choose after you're gone, they are not interchangeable. Understanding the differences between them is key to ensuring your estate planning is done right.
Here are some of the key distinctions:
How does a trust work?
A trust is a tool for estate planning and asset protection. It defines ownership and control over your assets.
When you create a trust, you transfer the ownership of your assets to the trust, which is its own legal entity. You become the grantor of the trust and you could name a successor trustee who would have control over these assets in the event of your incapacity or death.
The trustee has a responsibility to manage the assets held by the trust in the best interests of its beneficiaries.
Types of trust
There are several types of trusts, including revocable trusts and irrevocable trusts:
Revocable living trusts allow you to transfer assets outside the probate process, which a court uses to validate a will. Revocable trusts could be changed or ended, offering less asset protection. They also have no tax advantages and provide no protection from creditors.
Irrevocable living trusts also allow you to transfer assets outside the probate process, but they provide stronger asset protection because they cannot be altered or terminated. Assets in an irrevocable trust are beyond the reach of creditors and may not be considered part of a taxable estate. As a result, it's easier to avoid inheritance law with an irrevocable trust.
You could also create specialized trusts, such as special needs trusts for the care of a disabled person. Another trust type is a spendthrift trust, which you can use to leave money or real estate to minor children or people you do not trust to manage the funds responsibly.
Trusts give you much more control over assets after your death than wills. Trusts could also be harder to contest after your death because they go into effect during your lifetime and remain in effect for many years.
How does a will work?
A will is a legal document for estate planning. It’s usually simpler to create than a trust, and it does not require you to transfer ownership of assets during your lifetime. Instead, it simply provides you with the ability to specify who will inherit money or property after your death.
When you transfer assets through a will, they must pass through probate. This is a court process where a judge determines the validity of a will and allows creditors to make claims against the estate. Wills do not protect from creditors, and if the estate is large enough, assets transferred using a will might be subject to estate tax.
Last will and testament vs. living will
It's important to distinguish a last will and testament from a living will. A living will is a type of will used not to distribute assets but to specify what kinds of medical care you want to accept or decline in case of incapacity. Writing a living will is important to control your medical future. It goes into effect when health care decisions must be made during incapacity.
What both legal instruments offer
If you do not provide instructions for the distribution of your assets, state laws will determine which family members inherit property. Both wills and trusts change this by giving you the chance to specify what should happen to your money and property after your death.
Although both trusts and wills could be contested, a trust is created and goes into effect during your lifetime. It could be harder to contest a trust after your death when it has been in effect for several years.
It's possible to have both a trust and a will, so you could use both estate planning documents if you wish to do so. However, keep in mind that a will cannot override a trust. Assets placed in a trust will be distributed according to your trust.
6 Important differences between trusts and wills
1. Creation process
Trusts tend to be complicated, whereas simple wills are usually easy to create. That difference is reflected in their costs, as a trust would usually cost you more than a will.
Trusts also tend to cost more to manage over your lifetime, whereas a will is a more straightforward document with no ongoing expenses associated with its operation.
Although you could create a trust and a will without legal advice, it may be critical to get professional help with a trust due to its more complex nature. On the other hand, it's simple to write a will without a lawyer.
Winner: Wills are a more straightforward legal instrument that has a lower cost. If you don’t need the additional benefits of a trust, writing a will could be a suitable estate plan.
2. Implementation date
Trusts go into effect immediately when you create them, which means they are in effect during your lifetime. You would need to fund a trust when it is created, which requires you to transfer ownership of assets to the trust before your death.
On the other hand, a will is implemented upon death, and your assets are transferred to the named beneficiaries only after you have died.
Winner: No clear winner. Depending on your needs and situation, it might make sense to use a trust that goes into effect immediately or a will that goes into effect only after death.
3. Tax advantages
Certain types of trusts could provide tax advantages. For example, an irrevocable trust could shield assets from estate tax because the assets held by the trust are not part of the probate process.
However, when you use a will, your assets are usually distributed through a probate process. If inheritance or estate taxes apply, a will does not provide any way to lessen this financial burden.
Winner: A trust might be the better option when you need to add a level of tax protection to your estate plan.
4. Creditor protections
With certain types of trust, such as irrevocable trusts, assets could be placed beyond the reach of creditors. This type of trust provides strong asset protection to ensure your assets pass on to the person or persons you name.
A will does not offer the same protection. Because a will goes into a probate process, any assets in the probate estate could be subject to creditor claims. This means creditors could potentially take assets even if they were passed on to someone else in a will.
Winner: If you’re looking for more robust asset protection from creditors and debtors, you could consider creating an irrevocable trust. However, remember that it usually comes at a higher cost than a will.
5. Incapacity planning
A trust allows you to appoint a successor trustee. This is a person who would take over the management of trust assets if you become incapacitated and unable to manage your own wealth.
A will does not provide any protection for your assets in case of incapacity. It simply determines what happens to these assets after death.
Winner: Trusts allow you to name a successor trustee so you could plan ahead for situations other than death, which gives you more control over the future of your assets.
6. The ability to control assets after death
A trust offers more control over your assets even after your death. You could provide specific instructions for the successor trustee regarding when and how assets should be distributed to beneficiaries.
You could, for example, specify that an heir receives a specific amount of money per month or gets an inheritance only after getting married or to cover educational costs.
A will doesn't allow you this level of control; you could only dictate who inherits your assets after death without exact instructions on how and when your assets are distributed.
Winner: A trust offers a higher level of control over your assets and allows you to specify exact conditions for when they are distributed and in what amount.
Which legal instrument should you choose?
Deciding between a will versus a trust is a personal choice that depends on how complex your finances are, how much control you want after death, and how much money you want to spend on estate planning.
Writing a will may be sufficient if you have a small estate that might not be subject to inheritance taxes. A will might also make sense if there is no compelling reason to create a trust, such as a need to provide for a disabled loved one.
But suppose you want to put a trustee in charge of inherited assets, protect your assets in case of incapacity, have more control over them after death, or avoid inheritance taxes. In that case, a trust could be a better approach.
If you aren't sure which is right for you, you could consult an estate planning law firm. You could also use both legal instruments. You could create a trust and transfer some of your assets into it and provide instructions for distributing your remaining assets in a will.
How soon after death is a will read?
There is no formal reading of the will in most cases and no exact date for it. Instead, the executor receives a copy of the will and is responsible for notifying beneficiaries and admitting the will to probate court.
The court confirms the will's validity during probate, and the assets are transferred to the beneficiary designations. The probate process could typically take around nine to 18 months. However, the length of the process depends on the state, the complexity of the will, and whether it’s contested.
Does a will override a trust?
A will does not override a trust. If a trust and a will conflict, the trust takes precedence because the trust technically is the legal owner of the assets. The assets must be handled according to the terms of the trust.
At what net worth do you need a trust?
There is no specific net worth that necessitates the creation of a trust. People might create trusts for many reasons, ranging from avoiding estate taxes to protecting assets in case of incapacity or from creditors. If you want more control over what happens to your assets, you could create a trust with any level of wealth.
Knowing how to manage your money is essential during life, but it’s also crucial after death. Creating an estate plan could be vital to providing for loved ones.
You could use either a will or a trust to plan what happens after you pass. The right estate planning tools might depend on your situation, so be sure to explore your options and research them carefully. You could also get professional advice from an estate planning attorney if you need it.
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This article Trust vs. Will: What They Share (And 6 Ways They are Different) originally appeared on FinanceBuzz.