Wills and trusts are critical components of a well-thought-out estate plan, but it’s not always clear how the two differ. Both work to keep your assets safe and make the transfer of wealth to your heirs easier and faster after you pass away. However, they also have some fundamental differences.
Distinguishing between a will and a trust can help you decide which you need to include in your estate plan and how to best organize your assets.
What is a will?
Your living will is a legal document that specifies how you want to pass along assets to your heirs after you die. In your will, you will name a legal representative called an executor to carry out your wishes and make sure your assets are properly distributed.
However, before the distribution happens, wills must be “proved” in probate court. Probate can be costly because it requires attorneys and other fees, and it can also take over six months to complete. These costs and delays can make asset acquisition more difficult for your loved ones. Probate is also public, meaning your will designations are not kept private.
In addition to delegating which assets go where, your will can also include important information that won’t be found anywhere else, such as naming a guardian for minor children. Without this important information secured in a will, the courts will make the decisions for you.
What is a trust?
Trusts do similar things as wills but are fundamentally different in the way they are set up and managed. There are different kinds of trusts, but the most common are revocable and irrevocable living trusts. Revocable trusts can be changed for as long as you live, while irrevocable trusts are irreversible once they are created. Both types of trusts take effect as soon as you create them (unlike wills, which are only usable after you pass away).
Trusts can hold a variety of assets, but you must put them in the name of the trust instead of your own name. You can act as the trustee while you live, but you must name a successor trustee who will take over after your death. This person will act in the same way as the executor of a will by managing the trust according to your directions.
You will also name beneficiaries who will receive the assets from the trust. You can create provisions in your trust document that specify how and when assets are to be distributed. These kinds of provisions are not possible in a will and ultimately provide you with greater control over assets. This can be useful if you have minor children who will receive assets when they reach a certain age or if you have beneficiaries with special needs.
Another important thing to know about trusts is that they are not subject to probate like a will is. This means that assets can be passed directly to your heirs without needing to endure the costs, delays and publicity of probate court.
Will, trust or both?
Now that you understand the difference between wills and trusts, you may be wondering which option is right for you. There is no cut-and-dry designation of who needs a will, trust or both—it all depends on the individual and their estate.
A will is a good choice for almost everyone, especially those with minor children who require guardian designation. However, trusts may only be worth their cost if you have a sizable estate or require special provisions for inheritance.
To determine whether a will or trust is right for you, and to organize your estate plan in the best way possible, work with a financial advisor to sort out your affairs and stay prepared for the future.