What is the Difference Between a Will and a Trust?
When you’re planning for what will happen to your estate when you die, you may want to consider your options. Both a will and a trust are used to protect one’s assets. However, the two instruments function quite differently. You should understand their differences to determine which you choose the right path for your estate and beneficiaries.
A will goes into effect when the person dies while a trust can be in place while they are still alive and continuing after their death. With a will, the estate must go through probate with the court overseeing the disposition of the estate according to the terms of the will. Probate is the legal process of distributing assets when someone dies according to their final wishes.
When a trust is set up, probate is unnecessary. The trust is a separate legal entity that continues after the person’s death. This one difference is a key reason why many people choose to set up a trust for their assets. However, there is more to this decision than just how to avoid probate.
What is a Will?
A will is a legal document that provides for the distribution of the decedent’s assets after their death. It also lists the beneficiaries who will benefit from the estate. The decedent may include other instructions, such as who should act as the executor and who may be the legal guardian of any minor children. It can also provide directions for the funeral and burial.
The decedent may use the will to direct the executor of the estate to set up a trust for any underage children or for others to receive the assets at some time in the future. It would stipulate who would be the trustee or overseer of the trust.
For the will to be legal, it must be signed and witnessed according to the laws of the state where the decedent lives. The will is filed with the probate court in the county where the decedent resided. Once the person dies, a petition to open probate is filed and the probate court oversees the entire probate process.
What is a Trust?
A trust also provides for an estate and is a legal document. However, it doesn’t go through probate court. In this instance, it transfers all the assets from the estate and places them in a trust. The owner of the property who sets up the trust is known as the grantor. The person who maintains the trust is known as the trustee. The grantor can be the same person as the trustee, or they can designate someone else for that role. They will need to name someone else for the role upon their death.
Trusts are effective once they have been set up and the assets transferred. A living trust is created while the decedent is still living while a testamentary trust is set up after their death based on stipulations in the will. Trusts are commonly used in estate planning with the help and advice of a financial advisor.
Types of Trusts
Two main types of trusts exist. The revocable trust is one that can be amended at any time by the grantor. They can serve as trustee and is still basically the owner of the estate in the trust. The trust document may name a successor trustee for when the trustee dies or becomes disabled. The assets are included in the taxable estate since the grantor is still in control.
The second type of trust is an irrevocable trust. In this situation, the grantor has no more rights to the assets. They cannot alter the trust or control it. The trustee must be another person who will manage the trust. Income from the assets isn’t included in taxes and assets aren’t added to the taxable estate.
Other trusts exist for special purposes, but they generally fall into one of these two categories. They are usually set up for a limited amount of time and for a single purpose.
Who Needs Estate Planning?
It’s a common misconception that estate planning is only necessary if you are wealthy, own your business, or have valuable assets. However, estate planning can be a useful tool if you have any assets that you want your heirs to receive.
You can use estate planning to determine who receives your home, bank accounts, and retirement accounts. If you have problematic family relationships, a will or trust becomes even more important.
While you can plan for your estate on your own, it’s often best to work with a qualified estate planning attorney who can help you make the right decisions for yourself and your beneficiaries.
Do You Need a Will or Trust?
As you think about your estate, you will want to consider whether you need a will or a trust, or in some cases, both. A will guides the distribution of any assets that don’t automatically transfer to the beneficiary. Examples of assets that do transfer include bank accounts with Payable On Death (POD), life insurance policies and retirement accounts with a named beneficiary, and stocks and bonds that have a named beneficiary.
Some states allow you to transfer the title of a vehicle with a Transfer On Death (TOD). A few states even allow for a quit-claim deed on real property. If you aren’t sure what your state allows for transferring assets, you should speak with a probate attorney who will have in-depth knowledge of the probate process.
Another benefit of the will is that it stipulates who you want to receive your assets. Without a will, the estate is intestate. This means that the probate court decides who receives the assets of the estate according to state law. If you chose to divide up your estate in another way, you would need a will to ensure those wishes were followed.
When is a Trust Important?
If you have a larger estate or just want to avoid probate for your heirs, you may want to set up a revocable trust. Any assets included in the trust won’t need to go through probate, which simplifies the process for your beneficiaries.
The trustee can manage the trust after the decedent’s death, ensuring there are no delays in managing the estate. For instance, a trust could make it easier for the trustee to access funds to pay employees or utilities. With a will, a petition to open probate must be filed and a hearing set where the court will provide documents giving the executor authority to act on behalf of the estate.
When Do You Need a Will and Trust?
A trust without a will may not always be effective. There may be times when both will be necessary since they are two separate tools to manage an estate. A will can direct the distribution of any assets that were obtained after the trust was set up and not transferred into the trust.
Another time when you may need a will and a trust is when you don’t want the beneficiaries to have access to the estate now. You can use the will to create a testamentary trust, which is set up after your death with a trustee of your choosing. The trust may be in effect for a certain period of time or until a certain event occurs. Funds may be distributed in separate payments, or the entire trust may stay in place until it is distributed.
This legal arrangement is often seen when minor children are involved. The trust may be set up with monthly or annual distributions for their care until they turn 18, when they receive the remaining assets. The decedent may want to provide for their adult loved ones who aren’t good money managers. Rather than giving them full access to the estate, they receive only a limited amount at regular intervals. They may also receive the funds from the trust when they reach 30 years of age, get married, graduate college, or have a child as significant events.
What About Taxes?
A will doesn’t prevent your loved ones from paying taxes on their inheritance. A trust may reduce taxes, depending on how it’s set up legally. For this to happen, the grantor must give up the ownership of the assets placed in the trust.
To reduce taxes for yourself or your beneficiaries, it’s important to work with an estate planning attorney. They will know the state laws governing estate taxes, income taxes, and other taxes that the estate or your heirs may have to bear.
What About Creditors?
Another area where wills and trusts are different is with creditors. When an estate goes through the probate process with or without a will, the executor of the estate must notify creditors. They may be required to send out letters to the known creditors and publish notice in a local newspaper. Once creditors submit claims, the executor must pay them if they are valid.
A trust may work differently, once again depending on how it’s been set up. An irrevocable trust is usually beyond the reach of creditors because the property is no longer owned by the grantor. They have no control or rights to the assets in the trust.
As a side note, if the trust is set up for the purpose of avoiding creditors, it’s not likely that the assets will be protected by probate court from claims made.
Private vs. Public Record
When a will is filed with the court, it is made a public record. Anyone can look it up if they know where to go. A trust will remain private, which means no one has access to the information without permission. Many people who prefer to keep their assets private choose a trust for this reason. It doesn’t matter what kind of trust it is to be kept private.
Create Your Estate Plan
To protect your assets and your beneficiaries, it’s important to create a comprehensive estate plan early on. It should be a priority to set up to help your loved ones avoid possible problems later on. Whichever route you decide on, a will, trust, or both, you should consult with an attorney who will have your best interests in mind and help you make the right decisions about your estate planning options.