Will vs. Trust: An Overview
A will is a legal document that provides instructions on distributing property to beneficiaries after death. Trusts are legal structures that protect assets and direct their use and disposition by their owners’ intentions and are managed by a trustee.
A will takes effect upon death but trusts can be used both during the lives and after the deaths of the grantor, or creator. Wills and trusts can provide effective estate planning when used separately or together.
Key Takeaways
- A will is a legal document that defines how affairs are handled and assets distributed after death.
- A trust is an arrangement whereby a grantor, also called a trustor, gives a trustee the right to hold and manage assets for the benefit of a specific purpose or person.
- Trusts can have a limited term such as the duration of the grantor’s lifetime or can continue to hold assets and distribute them after the grantor’s death.
What Is a Will?
A will directs the distribution of assets to designated heirs and beneficiaries after death. It provides survivors with guidance for handling an estate and lessens the possibility of disputes. A will may include instructions for decisions after death like the appointment of an executor of the will, guardians for minor children, or directions for a funeral and burial.
A will must be signed and witnessed as required by state law. It is filed with a probate court in the local jurisdiction and carried out by the designated executor. The document is publicly available in the records of the probate court that oversees its execution and has jurisdiction over any disputes. Individuals can revise a will multiple times as personal or financial situations evolve or change.
Individuals who die without a will are subject to their state's intestacy laws. Intestacy entails probate court processes, time, and professional fees that could be lesser if you die leaving a will and a well-designed estate plan. A probate court will appoint an administrator to manage the estate and distribution of assets. Following common law, the property commonly goes to a surviving spouse first, then to children, extended family, and descendants. If no family exists, the property typically reverts to the state.
A will can also direct an executor to create a trust and appoint a trustee to hold assets for the benefit of particular persons such as minor children until they reach majority or a specified age.
What Is a Trust?
Trusts are legal structures that provide for the transfer of assets from their owner, called the grantor or trustor, to a trustee and eventually to beneficiaries. Trusts define the management of the assets, distributions to designated beneficiaries, and the ultimate disposition of the assets. The trustee is a fiduciary obligated to handle the trust assets by the terms of the trust document and solely in the best interests of its beneficiaries.
A “living trust” can be created during a grantor’s lifetime. A “testamentary trust” is established after death following directives in the decedent-grantor’s will. Living trusts created during the grantor's lifetime facilitate the transfer of assets to heirs without the cost and publicity of probate.
Trust transfers enable grantors to maintain privacy concerning the nature and value of their assets. Trusts ensure privacy for family businesses and real estate held through entities not publicly identified with their owners. Creating a trust to avoid probate may not be beneficial and more expensive than it's worth to create and manage if the value of an estate isn't significant or assets are limited.
Establishing a revocable trust to hold and distribute assets doesn't protect the assets from estate taxation if the estate's value exceeds the federal estate tax exemption. It's set at $13.61 million for an individual decedent in 2024 but it's indexed for inflation so it can increase a little each year.
Types of Trusts
- Revocable Trust: Revocable trusts can be altered, amended, or terminated during a grantor's lifetime. The grantor effectively continues as the owner of the trust assets for tax purposes. The trust document can also name a successor trustee to take over upon a grantor-trustee’s death or disability.Assets in a revocable trust pass outside of probate but are included in the grantor’s taxable estate.
- Irrevocable Trust: Grantors give up their ownership rights to assets when they transfer them to an irrevocable trust. Irrevocable trusts are managed by a trustee who is not the grantor. The income from the trust assets isn't included in the grantor’s taxable income or the grantor’s estate. The transfer of assets from the grantor to the irrevocable trust may protect the assets from the grantor’s creditors.
- Charitable Trust: Tax law provides special benefits for certain irrevocable trusts that benefit charities while providing some economic return to their grantor or beneficiaries.A charitable remainder trust is an irrevocable trust that provides current income to the grantor or noncharitable beneficiaries and a partial tax deduction based on the valuation of the contributed assets. The contributed assets are distributed to charities upon expiration of the trust's term which may be no more than 20 years or a term based on the life of one or more noncharitable beneficiaries.
- Special Needs Trust: A special needs trust is a legal arrangements that enable individuals with disabilities to receive financial support from the trust for particular purposes without jeopardizing their eligibility for federal and state public assistance programs, such as Supplemental Security Income (SSI) and other benefits.
Natural or adopted children have a statutory right to inherit but awill allows parents to disinherit a child. Provisions for disinheritance must comply with state laws. Detailed rules also enable a person to disinherit a spouse whether in a common law state, a community property state, or an equitable distribution state.
Designating Beneficiaries
Other legal arrangements can facilitate transferring assets directly to heirs like beneficiary designations for retirement and other financial accounts, and gifts of funds and other assets during a lifetime. These arrangements transfer property without probate after death.
Account holders can designate their beneficiaries for IRA and 401(k) retirement funds. Married couples' joint ownership of bank accounts and real estate can provide a right of survivorship that doesn't require probate if they're properly structured and documented.
Using Both a Will and a Trust
A will may be the least expensive and most efficient choice for small estates with easily transferred assets and simple bequests. A trust without a will can present problems concerning assets outside the trust that become subject to intestacy laws. Larger and more complex estates may benefit by using both arrangements.
It's usually advisable to have a carefully drafted will even if most assets are held in ways that avoid probate. A will and a trust can complement each other, allow swift asset transfers, maintain confidentiality concerning sensitive assets and directives, and prevent intestacy concerning estate assets whose disposition isn't governed by a trust or other arrangement for individuals of means and those with privacy concerns.
| Wills vs. Trusts | ||||||
|---|---|---|---|---|---|---|
| Trusts vs. Wills | Names Guardians for Minor Children | Probate Court | Can Be Revised | Private or Public Record | Tax Benefits | Creditor Protection |
| Trusts | No | No | Yes, if it's a revocable trust | Private | Yes, if it's an irrevocable trust | Yes, if it's an irrevocable trust |
| Wills | Yes | Yes | Yes | Public record | No | No |
Why Is a Will Important?
Leaving clearly explained directions for distributing assets may prevent potential disputes among heirs, children from more than one marriage, a dependent parent or relative, or offspring whose financial resources vary greatly. Many online willmakers offer tools for generating legal forms and documents but individuals should consult legal counsel and other appropriate experts as necessary.
Are Wills or Trusts Needed If Beneficiaries Are Designated on an Account?
Many assets such as IRA and 401(k) retirement funds can be transferred outside probate. Individuals can designate beneficiaries for such accounts with their bank, investment adviser, or employer during their lifetime. Married couples' joint ownership of bank accounts and real estate can provide a right of survivorship that doesn't require probate if they're properly structured and documented.
Does Transferring Property to a Trust Protect It From Creditors?
The vulnerability of trust assets to the claims of a grantor’s creditors is largely determined by state law. Courts will usually treat the assets as being beyond the reach of the grantor’s creditors if a grantor transfers assets to an irrevocable trust for the benefit of third parties or purposes and has relinquished all control, rights, and benefits concerning the assets. The trust is unlikely to insulate the assets from the creditors’ claims if assets are transferred to a trust to avoid creditors or under circ*mstances that indicate that it would be reasonable to assume that creditors would seek the assets.
How Does Estate Planning Affect Unmarried LGBTQ+ Couples?
Estate planning is the same for an LGBTQ+ legally married couple. Estate planning for unmarried couples, LGBTQ+ or straight, is essential, especially for long-term partners. State laws may favor blood relatives over partners. The goal is to ensure the surviving partner can access all the legal benefits despite not being legally married. It's critical to list guardianship provisions if an individual has underage children but a spouse hasn't legally adopted them. The courts may decide who raises them otherwise.
The Bottom Line
It's important to establish an estate plan earlier rather than later. Careful use of wills, trusts, or both can ensure that assets and possessions are distributed as intended. Making an estate plan a priority can save money and time later and help loved ones avoid potential financial hardship and conflicts.
