You may be wondering: should I have a trust or a will? These two documents are both important pieces of a comprehensive estate plan, but it’s important to know the differences and benefits of each.
Both wills and trusts are legally-binding documents used to distribute assets in your estate to beneficiaries (such as family members, loved ones, etc.) after your death. However, they differ in cost, content, execution, and the timing in which they become effective.
Living Trusts
A trust is a legal entity created to hold and manage your assets and 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.
After you establish your revocable living trust, you can still make changes to it as needed. Only an irrevocable living trust can’t be altered after it’s created.
Types of Trusts
Two common types of trusts are testamentary trusts and living trusts. A testamentary trust is a legal entity established through your will and as such only takes effect upon your death. A living trust is created during your lifetime and you transfer your assets into the trust while you’re still alive.
Benefits of a Living Trust
Establishing 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 probate court system. 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, the probate process may take months or even years to complete, and can be costly depending on where you live and the size of your estate.
Wills
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 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.
Difference Between Wills and Trusts
Now you know how each of these two estate planning options work, let’s unpack the main differences between a will versus a trust.
Difference #1: Effort Required
Trusts can be time-consuming to assemble as they need to be managed over the lifetime of the trust. Wills are 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 bypass 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 the complexity of your estate, but the average fees range from $1,000 to $2,000. In contrast, attorney fees for drafting a will average about $300. You can even write your own will or use online templates/builders to reduce costs further, whereas a trust is typically more 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 assets in the trust, such as a piece of property or life insurance. A will directs the distribution of nearly everything else held in your estate and handles additional things including guardianship of your dependents.
Will or Trust: Which is Better For You?
It’s important to remember that a trust and a 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 versus a 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.
Frequently Asked Questions
Here are some commonly asked questions about trusts and wills:
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. The most effective way of avoiding probate for your beneficiaries is to have a trust. However, since a trust handles only those assets owned by the trust, you need a will to ensure all of your remaining 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 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 living trust is operative once it’s 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 generally supersedes a testamentary trust. Since a testamentary trust is created by the will, it doesn’t become operative until the will takes effect.
Are Wills and Trusts Valid in All States?
When it comes to living trusts, 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 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 & Trust
Even if you’ve worked hard and saved diligently throughout your life, failing to create a formal estate plan can result in:
- Wrongful allocation of your assets
- A reduction in the value of your estate
- Loved ones unable to access their inheritance
Most attorneys will tell you that every estate plan should include at least a last will and testament. Additionally, a trust is the best way to avoid the probate process and transfer your assets privately. In many cases, having both a will and a trust in place will ensure your assets are distributed according to your wishes.
