If you are considering an estate plan, you are probably familiar with the terms “wills” and “trusts.” These two plans are two primary tools used in estate planning to manage and distribute assets. However, they differ significantly in structure, execution, complexity, and the benefits they offer.
Understanding the differences between wills and trusts is essential to appropriately arranging your estate. Selecting the correct plan will ensure that your assets are handled according to your wishes and that your loved ones are provided with the least friction, complications, and legal issues.
What is a Will?
A will, also referred to as a last will and testament, is a legal document that specifies how you want your assets distributed after your death. It is your most important estate planning tool because it allows you, the testator, to designate beneficiaries, appoint an executor to manage the estate, and name guardians for your minor children. Wills can also include specific instructions for handling debts, funeral arrangements, and other final arrangements.
What is a Trust?
A trust is a legal arrangement in which one party (the trustee) holds and manages assets on behalf of another party (the beneficiary). The person who creates the trust, known as the grantor or settlor, transfers assets into the trust, which are then managed according to the terms outlined in the trust document. Some trusts are designed to take effect during your lifetime (living trust), while others take effect upon your death (testamentary trust).
Key Differences Between Wills and Trusts
Probate Court
One of the significant differences between wills and trusts is how they facilitate your estate’s interaction with the probate process. Probate is a court-supervised proceeding to validate a will and oversee the distribution of the deceased’s assets.
Wills: A will must go through probate, which can be time-consuming and costly. During probate, the court authenticates the will, settles any debts and taxes, and distributes the remaining assets according to the will’s instructions. Probate proceedings are public, meaning the estate details become part of the public record.
Trusts: Most trusts are designed to avoid probate entirely. Because the trust, not the individual, technically owns the assets, they do not need to go through probate. This allows for a more private and expedient distribution of assets, often without the need for court involvement.
Timing and Flexibility
Wills and trusts also differ regarding when they take effect and how flexible they adapt to changes over time.
Wills: A will only takes effect after the testator’s death. It can be amended or revoked at any time during the testator’s life as long as the testator is mentally competent. However, once the testator dies, the will becomes irrevocable.
Trusts: Revocable living trusts, in particular, offer significant flexibility. They allow the grantor to manage, modify, or revoke the trust as their circumstances or intentions change. This can be particularly useful in cases where the grantor wants to plan for potential incapacity or changes in the family situation.
Control and Management of Assets
Another critical difference between wills and trusts is the level of control and management over the assets they offer.
Wills: A will allows you to specify how your assets will be distributed after death. However, it does not provide any mechanism for managing those assets while you’re alive. Once you die, the person you designate as executor is responsible for carrying out the terms of the will. Still, they must follow the probate process, which can limit their flexibility.
Trusts: Trusts provide a mechanism for managing assets during the grantor’s lifetime and after death. This can be particularly advantageous if you want to ensure that your assets are managed in a specific way or distributed over time. For example, a trust can be used to provide for a beneficiary with special needs, to manage assets for minor children until they reach a certain age, or to ensure that assets are distributed based on specific conditions or age milestones.
Privacy
Many people consider privacy an important consideration when planning their estate. Wills and trusts differ significantly in how much privacy they offer.
Wills: Probate is a public proceeding, meaning the details of the will, including the assets and beneficiaries, become part of the public record. This can be a concern for individuals who want to keep their financial affairs private.
Trusts: Trusts generally do not go through probate, so the details of the trust and its assets remain private. This makes trusts a popular choice for individuals who want to keep their estate plans confidential.
Costs and Complexity
The costs and complexity of creating and maintaining wills and trusts are significantly different.
Wills: Creating a will is typically less expensive and less complex than creating a trust. Most people can draft a will with the help of an attorney for a relatively modest fee. However, the costs associated with probate can be significant, especially if the will is contested or if the estate is large and complex.
Trusts: A trust is generally more expensive and complex than a will, requiring more detailed planning and legal assistance. However, the cost of administering the trust after the grantor’s death is usually lower than the cost of probate, especially if the trust is designed to avoid probate altogether. Additionally, trusts may require ongoing management and administration, which can add to the overall cost.
Tax Implications
Wills and trusts can have different tax implications depending on the size and structure of the estate.
Wills: Assets distributed through a will are subject to estate taxes, which can be significant for larger estates. Additionally, because a will must go through probate, additional taxes and fees may be associated with the probate process.
Trusts: Trusts can be structured to minimize estate taxes, particularly for larger estates. For example, an irrevocable trust can remove assets from the grantor’s taxable estate, potentially reducing the overall estate tax burden. Additionally, because trusts do not go through probate, they can help avoid some of the taxes and fees associated with the probate process.
Incapacity Planning
Planning for incapacity is an essential aspect of estate planning, particularly for individuals who want to ensure that their affairs are managed according to their wishes if they are unable to do so.
Wills: A will does not provide any mechanism for managing the testator’s affairs if they become mentally or physically unable to do so. In such cases, a court may need to appoint a guardian or conservator to manage the individual’s affairs, which can be lengthy and costly.
However, you can add two relatively simple estate planning tools that can help you manage your affairs if you become incapacitated—a power of attorney and a medical directive. A power attorney names a person you trust to act on your behalf to make financial decisions if you’re incapacitated, and a medical directive provides explicit instructions to your medical provider for your preferred treatment.
Trusts: A living trust can include provisions for managing the grantor’s assets if they become incapacitated. The grantor can appoint a successor trustee to take over the management of the trust, ensuring that their affairs are handled according to their wishes without the need for court intervention.
Will vs. Trust, which is Right for You?
Wills and trusts are both powerful tools for planning your estate. Each has its advantages and disadvantages. A will is a straightforward and cost-effective way to specify how you want your assets distributed after your death, but it must go through probate, a time-consuming and costly process. Trusts offer greater flexibility, privacy, and control over assets, both during the grantor’s lifetime and after their death. However, they can be more complex and expensive to create and maintain.
The choice between a will and a trust depends on various factors, including financial situation, family dynamics, and estate planning goals. For some, a simple will (along with a power of attorney and medical directive) may be sufficient to meet their needs. In contrast, others may benefit from the additional protections and flexibility a trust offers.
In many cases, a combination of both a will and a trust can provide the most comprehensive estate plan, ensuring that assets are managed and distributed according to the individual’s wishes with minimal complications and legal challenges.
Seek the Guidance of a Qualified Estate Planner
Consulting with a qualified estate planning attorney is essential to determining the best approach for your unique circumstances. By carefully considering the differences between wills and trusts, you can make informed decisions that protect your assets and provide for your loved ones most effectively.
Our expert team of fee-only financial advisors has years of experience guiding our clients through the estate planning process. We invite you to schedule a free consultation to discuss your estate planning goals.
