“A will answers, ‘How do you give your assets to someone when you die?’ ” said certified financial planner Bryson Roof of Fort Pitt Capital Group of Pennsylvania and Florida. “A trust can be used in the same fashion, but tends to be used for more complex situations or when someone wants to retain a level of control. To me, trust equals control.”
What’s the Difference Between a Trust and a Will?
Wills and trusts may seem similar, but they are means to accomplish different goals. Here’s how they differ.
|Purpose||Assign a guardian, divide assets||Very flexible but provides more control over assets|
|When It Takes Effect||After death||Both before and after death.|
|Probate Court||Almost always goes through probate court||Avoids probate court|
|Child Protection||Inheritance goes directly to child||Inheritance stays protected inside trust|
A will is a document intended to simply divide your assets and explain whom you wish to take care of your child if you die. For example, a will outlines who should be provided guardianship, or custody, of any minor children if both parents die. You can also name the person you want to handle your financial affairs after death.
A trust is a way to transfer your assets but can serve various functions, depending on the trust type and what the attorney includes. The uses of a trust can include:
- Minimizing estate taxes
- Protecting beneficiaries from creditors
- Preserving assets for minors until they’re adults or reach specific ages
- Benefiting a charity
- Managing property in multiple states
- Providing for a special needs child
As an example, Roof said parents often use a trust if a young adult is involved. “If you have a kid in college, do you really want them to inherit a million dollars and blow it on cars, gas, and motorcycles?” Roof said. A trust can stipulate that the money is given out in chunks at ages 18, 25, and 35. Or you can insert rules stating that funds must be used for health, maintenance, education and support, he said.
There are two main trusts: revocable and irrevocable trusts. Each type of trust has different advantages and disadvantages.
When It Takes Effect
A will becomes effective at death. If you’re incapacitated through mental or physical disability, the will won’t yet be accessible or effective in court.
In contrast, a trust can be set up so it takes effect even while you’re alive. For example, you can set up a trust so money, property, and other assets can be managed by someone else if you’re sick or incapacitated. A trust can also kick in after you have passed away or lost mental capacity. Trusts are far more flexible with regard to when they take effect.
A will must go through probate court to ensure the will’s validity. The probate process will be publicly available information. Probate court can be expensive and take longer. Assets in each state must go through probate in that state.
If you hire a professional trustee to manage a revocable living trust while you’re alive, that person will also likely charge a fee. This is also a way to have a bipartisan person take care of managing your trust and take they burden off loved ones. It can reduce family arguments as a third party would be the one in charge and everything would be distributed as you have determined according to your trust.
“You can elect to have a family member such as your mother or daughter to manage your trust, and they may not charge a fee,” Roof said. “We often see this with aging parents in nursing homes, and a son or daughter will manage the trust on behalf of their parents without charging a fee.”
Some assets may not need to go through probate, even if you only have a will. For example:
- Joint bank accounts
- Bank, retirement, life insurance, and other accounts where the deceased named someone as a beneficiary.
Which Is Right for Me?
Each person’s circumstances are different and there is no set formula for deciding which route you should take. However, there are some questions you can ask yourself, and those answers can guide you into choosing between a will or a trust.
A simple will may be right for you if you:
- Want to choose who handles your affairs after death
- Have children and want to decide on their future guardians
- Want to direct where your assets go after death versus the state (if you have no will)
- Don’t have many or complicated assets
Some type of trust may be right for you if you:
- Want to appoint a trustee to manage your assets, even while you’re alive
- Have assets in multiple states
- Are concerned about privacy
- Want more control over how and when assets are distributed
- Are concerned about an adult child’s spending
- Have a loved one who is special needs, or not a U.S. citizen
- Hope to provide your beneficiaries with easier, faster access to your assets
- Want to avoid t probate process and the fees that come with it.
- Want to protect your children’s inheritance.
- Want to reduce federal estate taxes.
- Want protection from a spouse who remarries after your death.
Some attorneys may also suggest a trust for nursing-home planning, tax planning, or gift planning.
A Best-of-Both Worlds Option
Many people could benefit from having both a will and a trust. The right vehicle(s) for you depends on your situation, state law, and what you hope to achieve after your death.
In fact, you can establish a trust within a will, and name your trustee for those trusts. Even if you set up a revocable trust—which can be seen as similar to a will—you’ll likely still set up what’s called a “pour over” will to address any assets you didn’t address and to establish a guardian for your minor child.
Most attorneys have a package deal for estate planning, Roof said. This includes:
- Last will and testament and a trust, if necessary
- Medical power of attorney
- Advanced medical directive
- Financial power of attorney
- Living will
- Pour over will
The Bottom Line
A trust can be a powerful tool to manage your financial legacy in this lifetime and after you die. A will is a more straightforward tool to distribute your assets and request a specific person for guardianship of a minor child.
Depending on your situation, you may choose one or both—but it’s wise to consult on an appropriate approach. Without a will or trust, your state’s courts may be making all the big decisions. “Typically, the way the state deems your assets to be distributed is not the way you intended,” Roof said.
It is wise to consult an attorney who can ask the important questions and ascertain which is right for your particular situation.
Frequently Asked Questions (FAQs)
Can I change my trust or will?
You can always make changes to a will or revocable trust by following your state’s laws regarding changes. Crossing out sections probably won’t hold up in court. You should consider updating your will in the event of a significant life change, moving to a new state, tax-law change, or your property’s value and type change dramatically. You cannot change or revoke an irrevocable trust, which is why it’s rarely used.
Can I make my own will or trust?
Numerous forms and online services offer DIY wills and trust-making, and some states allow holographic wills that are handwritten. However, if you don’t follow state law, your will may not be followed, and your property may not go to the people you wish. Only an experienced attorney can ensure your estate plans achieve your goals and don’t run afoul of state laws.
Also, read one of our previous Blogs at:
Last Will and Testament vs. a Trust: What’s the Difference?
Click here to check out our On Demand Video about Estate Planning.
Click here for a short informative video from our own Attorney Bill O’Leary.