Key Takeaways:
- Wills are legal documents that outline how you want your assets to be divided up after your death.
- Trusts are legal arrangements that allow you to transfer ownership of your assets while you are alive, avoiding probate court.
- Many people benefit from having both a will and a trust.
What Are Wills and Trusts?
Wills and trusts are legal strategies that people use to plan their financial estates.
A will is a legal document that lays out the last wishes of someone upon their death. It outlines who inherits specific assets, such as a house, a car or cash. You can draft a will with or without a lawyer’s help. But to make it legal, most states require the draft to be witnessed by at least one other person who isn’t listed as a beneficiary.
Trusts are legal arrangements that transfer assets from one person or from multiple people to a separate legal entity. Trusts that are active while you’re alive are called living trusts, and trusts that activate upon your death are called testamentary trusts. People who compare wills to trusts are usually referring to living trusts.
Third parties that administer trusts are called trustees. You can hire a professional, such as an accountant or a lawyer, to be your trustee, or you can appoint a friend or family member to the position. You can also appoint the beneficiary as the trustee.
How Do Wills and Trusts Differ?
Wills dictate what happens to your property when you die, and you can only use them to allocate your assets upon your death. They’re also a public record, so anyone who feels they have a claim to your estate — or something in it — can file a dispute.
Trusts, on the other hand, let you distribute your estate while you’re alive and can offer assets to your loved ones right away. Because you no longer own any assets placed in an active trust, you may also reduce some of your estate’s tax burden.
But in many cases, you’ll be able to access your trust assets to fund your retirement. After your death, your trustee will distribute specific assets in the trust based on your legal instructions.
Trusts and wills also function differently when it comes to taxes and ownership. While you keep control of any assets placed in a living trust, those assets now belong to the trust and not to you. This may allow you to bypass some estate taxes with the proper provisions.
Assets mentioned in a will remain your property until your death. When you die, they become part of your estate and are subject to all applicable taxes. They may also be garnished by creditors before or after your death to repay any debts you owe.
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How Are Wills and Trusts Similar?
Wills and trusts play a similar role in the estate planning process in that both ensure that your property gets distributed according to your wishes. In both cases, you can choose who receives major assets like your house, art collection, stocks or liquid funds.
Pros and Cons of Wills and Trusts
There are several pros and cons to consider when comparing wills versus trusts.
While wills are simpler to create than trusts, they must pass through probate process, which could take months before they’re distributed with court approval. This can be a real detriment for survivors who rely on you for food, shelter and transportation.
Pros and Cons of Wills
Pros:
- Simple and straightforward
- Costs less to set up than trusts
- Can be written with or without legal aid
Cons:
- Can be costly to set up
- Require help from a lawyer
When Should You Create a Will?
Wills are a sound financial option for people with limited assets. It makes little sense to spend more money creating a trust when signing a will does the job. A will is a simple, elegant solution that can give you immediate peace of mind.
In a will, you can direct your assets to the people you want to have them after you die. If you have young children or other dependents, creating a will ensures your property and assets end up in the care of someone you trust.
You can also use your will to entrust beneficiaries with certain items you want them to have. For example, you might specify that your daughter is to receive your prized pieces of heirloom jewelry.
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When Should You Create a Trust?
Trusts are a smart option for people with many assets. By placing those assets in a trust, you can avoid probate fees. You also may reduce your tax liability.
Trusts also ensure that your heirs receive your assets almost immediately after you die. This is important when you have dependents who count on you to provide for them financially.
Trusts are also not a public record, which makes them a more private document than wills. However, some terms of a trust may enter the public domain with certain court filings related to land ownership and tax returns.
Finally, trusts can provide peace of mind when naming a beneficiary whose money management abilities may be impaired. For example, parents of disabled children often set up trusts to ensure that their kids are cared for once the parents pass on. Using a trust for this purpose ensures that the trustee will always be available to help those children manage the money they receive.
Should You Have Both?
Having a living trust and a will at the same time is often the best choice for estate planning. You can create a living trust to handle some financial aspects of your estate and use your will to handle the rest.
To decide if you need both a will and a trust, think about your needs and responsibilities.
Questions To Consider
- Do you have young children who will need a guardian?
- Do you want to leave some of your belongings to specific people in your life?
You can address these things in your will.
If you’re not sure whether having both a will and a trust is right for you, consult a lawyer or financial advisor. They can review the specifics of your case and offer advice that is tailored to you and your family’s needs.
