Although the names of these documents are commonplace, many people don’t know what the difference between a will and trust is. We’re here to help you understand the differences, advantages and disadvantages of each, and whether a will or trust is a better fit for your needs.
The Difference Between a Will and a Trust
Both wills and trusts are legally-binding arrangements that help you officially manage the distribution of assets in your estate to beneficiaries (such as family members, loved ones, etc.). However, they differ in their cost, content, execution, and timing in which they become effective.
What is a Trust?
A trust is a legal entity created to hold and manage your estate during your lifetime, as well as dictate how your assets will be distributed after your death. You can choose to manage the trust yourself, or you can assign an individual or entity, known as a trustee, to manage the entity on your behalf.
Types of Trusts
The two most common types of trusts are testamentary trusts and living trusts. A testamentary trust is a legal entity established alongside your will. Both go into effect upon your death. A living trust is an entity created and managed during your lifetime. When establishing a living trust, you need to choose between a revocable vs irrevocable trust.
Benefits of a Living Trust
Choosing to establish a trust to manage your estate presents two main benefits. First, living trusts do not have to go through a probate process, which is an asset authentication and distribution process carried out by the court. Avoiding probate saves your loved ones time and money.
Second, living trusts are not public information. Therefore, your assets will be distributed completely in private.
Depending on the circumstances, a probate process may take months or even years to complete, and cost 5% or more of the total value of the estate.
What is a Will?
A will, also referred to as a last will and testament, is a legal document that specifies how your estate and affairs are to be handled after your death. A will typically allows you to:
- Appoint an executor to ensure your affairs are settled according to the terms stated in your will
- Allocate your property and assets to beneficiaries
- Delineate pertinent information such as bank account details and asset location
- Designate a guardian for your dependents (children and elders)
- Plan for and fund your funeral
In order to be effective, a will must be authenticated by a court-supervised process referred to as probate. You can revoke or amend a will any time after it’s been executed, provided you’re mentally competent.
Use a Codicil to Will to alter, revoke, or add to your previously executed will.
The Key Differences Between a Will and a Trust
Now you know how each estate planning option works, it’s time to unpack the main differences between a will versus a trust.
Difference #1: Effort Required
Trusts are time-consuming and expensive to assemble as they need to be managed over the lifetime of the trust. Wills are cheap and easy to create as they don’t require ongoing management, and simply become effective after your death.
Difference #2: Cost
Although the set-up fees may make a will seem more appealing, a trust allows beneficiaries to skip the probate process. This can translate into significant savings in time and money for the beneficiaries of a trust compared with a will. The cost of establishing an attorney-drafted trust will vary depending on your estate, however the average ranges from $1,000 – $1,500. In contrast, attorneys fees for drafting a will average approximately $300. You can even write your own will or use online templates/builders to reduce costs further, whereas a trust is too complicated to set up on your own.
Difference #3: Privacy
When a will is filed with the courts for a probate hearing, it becomes public record. This isn’t the case with a trust, which remains private. Depending on your particular situation, you may prefer keeping personal matters behind closed doors, which makes a trust your better option.
Difference #4: Function
It’s important to note that one generally doesn’t replace the other. A trust focuses explicitly on the distribution of specific assets, such as a piece of property or life insurance. A will directs the distribution of nearly everything else held in your estate, including guardianship of your dependents.
Will or Trust: Which is Better For You?
It’s important to remember that a trust and will are not mutually exclusive. You can use both in your estate plan. However, if you only want to use one, the choice between a will vs trust ultimately comes down to your estate plan goals and the probate laws in your state.
Do I Need a Trust?
In general, trusts are more suitable for large complex estates with considerable wealth and assets to distribute. If you’re concerned about the amount of estate or gift taxes that will be taken out of your beneficiaries’ inheritance, then a trust might be for you.
Do I Need a Will?
A will can be a great option If you have a fairly simple estate, and just want to ensure your property and high-value assets are distributed to your loved ones. If you’re not concerned by the probate taxes administered by your state, then a will should suffice.
Will Vs Trust: Important Things to Know
Do You Need a Will if You Have a Trust?
Most attorneys will tell you that every state plan should include a last will and testament. Although a trust is an excellent estate planning tool, it doesn’t cover everything. Even a well-executed trust can miss assets, and some subject matter just isn’t covered by a trust, such as the appointment of a guardian for your dependents. If you’ve acquired or disposed of major assets since setting up your trust, a will acts as a safety net. This is known as a pour-over will, which accounts for any potential “forgotten assets.”
Can You Have Both a Will and a Living Trust?
As important as a will and trust are separately, you should include both in your comprehensive estate plan. Although some of their content may overlap, each provides exclusive protection and benefits. The most effective way of avoiding probate for your beneficiaries is to have a trust. However, since a trust focuses on specific assets, you need a will to address the sum total of your holdings. A will ensures all of your assets, dependents, and funeral arrangements are accounted for.
Does a Will Override a Trust?
While a will and trust are meant to work together to accomplish your estate distribution goals, the two documents might contradict each other. Whether a trust supersedes a will, or vice versa, depends on the type of trust.
Living Trust vs Will
Generally, when it comes down to a last will vs a living trust, a living trust supersedes a will. This is because a trust is operative once executed, while the grantor is alive. Therefore, a trust is legally-binding before a will, which only comes into effect after the grantor dies.
Testamentary Trust vs Will
On the other hand, a will will generally supersede a testamentary trust. Since a testamentary trust is created within a will, it doesn’t become operative until the will takes effect.
Are Wills and Trusts Valid in All States?
After you’ve gone through the trouble of establishing your estate plan, you don’t want to find out that it’s not valid where you live. Below is a brief overview of the jurisdiction limitations of trusts and wills (if any).
When it comes to living trust, you don’t need to worry about state borders. After a living trust has been executed, it is valid in all states — not just the state in which it was created. For example, a living trust created in California would still be honored in Florida or Illinois.
Similarly, the majority of states honor valid out-of-state wills. However, state rules may vary regarding marital property and who can serve as an executor for an estate.
So, if you’re planning on permanently relocating to a new state, it may be necessary to amend or update your existing will — or even create a new will. It’s important to note that probate costs vary depending on the state, so make sure you’re aware of the amount of taxes your beneficiaries will face in various states.
Key Takeaways: Will versus Trust
You’ve worked hard and saved diligently throughout your life to accumulate wealth, but do you know what will happen to your estate in the event of your death? Although it’s true that “you can’t take it with you when you go”, you should have a say in the allocation of your possessions and property after you’re gone. Failing to create a formal estate plan can result in:
- Wrongful allocation of your assets
- A reduction in the value of your estate
- Inability to access inheritance by your loved ones