What Is the Difference Between a Will and a Trust?
Dan Armstrong
Attorney, Law Offices of Dan W Armstrong, P.A. & Proud Marine Vet Nam Vet
?Wills and trusts are foundational estate planning tools. While each is used to distribute assets to beneficiaries, they do so in different ways. Each also has its own distinct uses and advantages. They’re often used together to close gaps in an estate plan and prepare for multiple scenarios that might otherwise cause unexpected burdens for heirs.
WHAT IS A WILL?
A “last will and testament,” or simply, as a will, is the most basic estate planning tool. It provides instructions about what should happen to your assets — including bank accounts, real estate, investments, business assets, digital assets, and personal items — after you die.
A will may direct donations to charity, name a guardian for minor children and pets, and provide for funeral arrangements.
The person who creates a will (the “testator”) names an executor to ensure that the instructions in their will are carried out, and that the legal requirements for administering an estate, such as paying creditors, filing tax forms, and completing probate, are fulfilled. (Probate is the court-supervised process of validating the will, overseeing its administration, and ensuring your assets are distributed the way you intend.)
Perhaps most importantly, a will guarantees that you do not die “intestate,” or without a will. Dying intestate leaves crucial estate decisions up to state law and the court, including how your assets will be distributed and who will care for your minor children.
It is a relatively simple, inexpensive process to create a will. Yet only around one-third of American adults have a will .
Wills should not be confused with living wills. A living will, or advanced directive, pertains to medical treatment preferences and end-of-life care decisions.
WHAT IS A TRUST?
A trust is a contractual legal arrangement that allows a third party (the “trustee”) to hold and manage assets on behalf of a beneficiary (or beneficiaries). The person who creates the trust is called the “grantor.”
The grantor can fund a trust with the same types of assets that are typically named in a will. However, the assets are retitled in the name of the trust, making them the property of the trust — not the grantor. A trustee then manages those assets, and distributes them to the trust’s beneficiaries, according to the terms of the trust document.
Different types of trust types achieve specific estate planning objectives. For example, a living trust allows the grantor to serve as trustee and control the trust’s assets during their lifetime. When they pass away, a new trustee takes over. Living trusts also offer incapacity planning.
Other reasons to use trusts are to avoid probate or reduce estate taxes. Someone may use a trust to place conditions on how assets can be used. (For example, a beneficiary may only inherit assets once they reach adulthood.)
Trusts, in short, provide more flexibility than wills and allow an estate plan to be tailored to many situations.
WILL VS. TRUST DIFFERENCES
Wills and trusts are not mutually exclusive. Both are useful in achieving certain purposes and can work together in an estate plan.
Effect
A will becomes effective only after your death. A trust takes effect as soon as you create it and can distribute property before death, at death, or afterward.
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Assets
A will covers any property that is only in your name when you die. It does not cover property held in joint tenancy or in a trust. A trust, conversely, covers only property that has been transferred to the trust. Property must be in the name of the trust to be included in it.
Beneficiaries
A trust usually has two types of beneficiaries. The “primary beneficiaries” receive assets/income from the trust during their lives. The “successor beneficiaries” receive whatever trust funds remain after the first set of beneficiaries dies.
Wills do not allow for successor beneficiaries, but they do allow for “secondary” or “contingent” beneficiaries. These beneficiaries serve as a backup in case your primary beneficiaries predecease you.
Probate
A will passes through the probate process, while a trust does not, which can save time and money. And unlike a will, which becomes a matter of public record, a trust can remain private.
Taxes
Wills are not a tool for avoiding estate and inheritance taxes assessed at the federal and state levels.
Most estates are not large enough to qualify for these taxes. Those that do may be taxed up to 40 percent, leaving considerably fewer assets for heirs. However, transferring assets into trusts can avoid these taxes.
Cost
It generally costs more to set up a trust than a will. Actual costs depend on the estate’s size and complexity.
Online wills and trusts are available, but using these could lead to errors and clarity issues that throw your estate into chaos and jeopardize your legacy.
Work with your estate planner to ensure your documents are valid and your final wishes are carried out.
DO I NEED A WILL OR TRUST?
Anyone with assets that they want to pass on to particular beneficiaries should have a will. Trusts are more appropriate on a case-by-case basis. For example, if you hope to avoid probate or estate taxes, or have jointly owned property not covered by a will, consider a trust.
One type of estate planning tool is not necessarily better than another. Which tools make sense for you depend on your circumstances and goals.
Work with your?estate planning attorney to learn what legal documents should be part of your estate plan.