Key Takeaways:
A will allocates how your estate should be distributed upon your death, while a trust is an arrangement giving a trustee the right to manage your estate once set up
With a trust, the owner of the assets (trustor) may continue holding and managing the assets but appoint a successor trustee to take over after their incapacitation or death
A will must go through a court approval before execution, a process that compromises its privacy
A trust can be executed immediately the right of management passes to the trustee, without the public exposure of a court process
Making a will is far less costly than setting up a trust
A will can be contested by the beneficiaries or other interested parties, while a trust is not contestable
Trusts and wills are both estate planning instruments you can use to determine what should happen to your assets in relation to your beneficiaries. As much as they share some similarities, they are quite different, especially regarding how and when they become effective. Having them both is a wise move, but that should depend on factors such as your estate’s size or your age.
Ideally, drawing a will is essential for everyone, as it captures how you would wish your estate distributed upon your death. It also allows you to assign guardians for your minor beneficiaries. This might not be the most comfortable thing to think about or do, but it’s far much better than leaving your heirs at the mercy of the court.
Generally, will execution (probate) is a lengthy process, not forgetting there’s always a probability of being contested. Thus, putting some assets under trust helps eliminate court involvement during execution, providing a much easier transition upon your death.
Before we discuss the differences between wills and trusts in-depth, let us first look at their definitions and the different types of each.
What Is a Will?
A will is a deed that stipulates how your estate should be administered/distributed to your beneficiaries after your death. You may also appoint guardians for young children or beneficiaries with special needs and direct the creation of a trust to hold the assets until they reach legal age or for the duration you set.
Upon your death, execution of the will must follow a court process (probate), during which a dissatisfied beneficiary can contest it. While a will is a public document, in that anyone can access it once it’s in court, it helps give clear instructions of who should get what, thereby eliminating unnecessary conflict.
Types of Wills
Simple will – Is a testament directing how your assets should be distributed to your beneficiaries. You may also appoint a guardian for minors and an executor.
Living will – As the name suggests, is effective while you’re alive. But it springs into effect once you become incapacitated and cannot communicate your wishes regarding your health. Simply, the will states how you would like your medical care addressed should you become incapacitated, which relieves the burden off your loved ones, especially where difficult decisions need to be made.
Joint will – Combines the wills of two individuals, e.g., spouses who appoint each other as first beneficiaries, then their children. The moment one spouse dies, the joint will become irrevocable.
Pour-over will – Acts as a contingency for those with a living trust. In case there are assets not yet transferred to the trust, a pour-over will allow for the transfer of such assets to the trust upon your death.
What Is a Trust?
A trust is an arrangement involving transferring assets from the owner (trustor) to a trustee providing management guidelines on behalf of beneficiaries. The assets’ owner may continue holding them then appoint a successor trustee to manage their affairs upon their death or disability.
Unlike a will that becomes effective upon the testator’s death, a trust is effective during the trustor’s (grantor) lifetime from the moment the trust is funded. The only exemption is in the case of a testamentary trust (a trust created by a will, whereby a testator instructs the creation of a trust to hold assets for minor beneficiaries).
Perhaps, the best side of a trust is that the successor trustee can take over managing your affairs without the court’s approval, thereby protecting your estate’s privacy. Nonetheless, a trust does not allow guardian designation for minor beneficiaries. So you still need a will alongside a trust to take care of these and other limitations.
Types of Popular Trusts
Revocable living trust – Is an estate planning vehicle that allows you to transfer your assets into a trust while you’re living and appoint a trustee to manage the assets or distribute them once you die. As the name implies, a revocable trust can be altered anytime during your lifetime as long as you’re mentally competent to do so. However, the trust does not remove the assets from your taxable estate or protect them from recovery by creditors.
Irrevocable trust – Also involves transferring assets into a trust for management by a trustee on behalf of your beneficiaries. However, unlike a revocable living trust, an irrevocable trust moves the assets from your taxable estate, securing them from creditors. As you would expect, an irrevocable trust cannot be changed once established.
Charitable trust – Is set up to distribute funds to a charitable organization. It is a type of irrevocable trust, meaning the funds are subject to tax benefits.
Testamentary trust – Also known as a will trust, is created by your last will for holding assets for minor beneficiaries until they reach a certain age. Unlike the living trust, a testamentary trust does not have privacy protection as it must go through the probate.
Differences Between a Will and a Trust
While you can use a will or trust to plan your estate and determine what should happen to your assets once you die, the two have unique features that set them apart. We have already mentioned some of their key differences, but there’s more.
Let’s take a look at them in more detail.
Effective Date
A will takes effect once the testator dies. On the contrary, a trust becomes effective while you’re still living, immediately after funding.
Incapacitation Provision
Since trust is effective while you’re living, if you become incapacitated, your successor trustee can take up managing your affairs. Conversely, a will does not provide for what happens to your estate should you become incapacitated since it’s not legally viable until after your death.
Privacy Preservation
A will must pass through a court process, which makes it available to the public. Hence you are not able to keep your estate private. On the other hand, a trustee can execute your requirements on your estate without the court’s approval. This helps safeguard the privacy of your estate.
Probate
A will requires court confirmation before the executor can distribute your assets to the beneficiaries. On the other hand, a trust can transition to the trustee immediately without the lengthy court process. This allows for immediate execution of the trust requirements.
Contestability
Since a will takes effect after the testator’s death, the beneficiaries can contest it. For instance, they might argue that the testator was not mentally competent when making the will. On the contrary, trust is not contestable.
Guardian Designation
A will allows you to assign guardians for your minor children while a trust does not provide for this.
Precedence
Wills and trusts are provided for under different laws – testamentary and contract laws, respectively. In practice, contract law has stricter standards than testamentary law, which gives trusts more power over wills. This means that if you create a will and a trust, as much as both are effective, the trust’s provisions supersede the will.
Credit Protection
A will does not shield an estate from recovery by creditors. However, once you transfer assets to an irrevocable trust, they are no longer part of your estate, meaning they are protected from creditors and lawsuits. However, a revocable living trust does not provide protection since the assets are still considered as part of your estate.
Cost
Making a will is a much simpler process, hence less costly. However, creating a trust is a complex process, making it far more expensive than preparing a will.
Will vs. Trust: Which One Is Right for You?
Ideally, everyone needs a will. Even though trusts provide more benefits than a will, e.g., privacy protection and tax benefits, among others, your decision to create a trust may be affected by several factors. Due to the hefty cost involved in a trust setup, you may need to consult widely to ensure you’re making a wise investment. For instance, you may consider consulting a financial advisor or an estate planning attorney. A tax advisor could also help you better understand the tax implications in setting up an irrevocable trust.
At Easler Law, we can help you through this critical process of planning your estate. For all your inquiries and concerns, feel free to book a meeting here.