Knowing the difference between a will and a trust is essential for anyone creating an estate plan. This article will cover five critical differences between the two documents to make it easier to understand which one is best for you.
Wills must go through probate after death, while trusts do not. This enables them to avoid the probate process, which can be expensive and public.
It’s Effective Immediately
What is the difference between a trust and a will? A Will only goes into effect after death, but a revocable living trust can help you protect your assets during your lifetime. Suppose you cannot manage your investments for any reason (such as becoming incapacitated or mentally impaired). In that case, the trustee designated in your trust can make distributions, pay bills, and file taxes on your behalf. You’ll need to provide documentation supporting your designations for each asset. For example, to transfer real estate into a trust, you’ll need the deed; for 401(k) accounts or bank accounts, you may need specific paperwork from the institution.
When establishing a trust, you will work with an attorney to draft the document based on your wishes to distribute specific assets. You will also name beneficiaries and provide instructions about taxes and debts that should be paid.
In addition, you’ll appoint one or more persons to serve as the trustees to ensure that your estate plans are carried out as you wish. These trustees can be your family, a friend, or a professional fiduciary.
It’s More Flexible
At times, circumstances, and tax laws change, trusts offer flexibility in how assets are transferred to beneficiaries. For example, trusts can include provisions that shelter assets from taxable estates. This includes generation-skipping trusts that transfer assets to heirs at least two generations younger, qualified personal residence trusts that remove a home from taxable estates, and life insurance trusts that shelter the proceeds from the taxable estate.
A trust can also distribute assets before death or even during your lifetime. This is important for individuals who want to minimize the risk of their will being contested.
However, trust is not without costs. Trust documents must be carefully drafted to ensure they are clear and specific. Any vagueness could make the faith a contested matter. Additionally, various fees are associated with confidence, including attorneys’ fees, property registration or title transfers, filing fees, and compensation to the trustee. These fees can add up over time. These costs may negate any savings in probate fees that a trust avoids.
While a trust can help you pass on your wealth to loved ones by your wishes, it’s also a way to keep those plans private. Unlike a will, which goes through probate and becomes a public record, a trust remains private.
Generally, a grantor works with an attorney to create the trust document that specifies the terms for distributing specific assets. Then, the grantor chooses a responsible person or firm to act as trustee—the party who manages the trust funds. The grantor can also specify successor trustees in the event of the current trustee’s death, resignation, or incapacity.
The trustee can choose to distribute income from the trust on a specific schedule or hold it in reserve and sprinkle it among the beneficiaries as the grantor desires. The grantor can also establish different types of trusts, including a special needs or spendthrift trust to meet the unique requirements of individuals dependent on government assistance. The trustee can also include instructions for paying taxes and debts or leaving a prized collection of art, coins, or stamps to a museum or nonprofit institution.
It’s More Costly
Although trusts may seem geared only toward high-net-worth families because of their cost, they are increasingly used by individuals of all economic backgrounds. Some choose to use a trust to avoid probate, ensure that heirs are provided for, provide privacy, and protect against lawsuits or disputes over assets.
For example, a generation-skipping trust allows people to transfer their estate tax-free to beneficiaries two or more generations younger than themselves. And a qualified personal residence trust can remove a home from a person’s taxable estate.
Despite the many advantages of trusts, some people prefer to use a will instead. This decision comes down to the amount of control one seeks over how their assets are disseminated, the value of the property in question, and whether or not court supervision is desired. Regardless of your choice, discussing your needs and desires with an attorney is always best. A well-drafted estate plan is the best way to minimize costs, avoid disputes, and fulfill your wishes.
It’s More Flexible
Some trusts allow for the dispersion of assets to beneficiaries based on specific conditions. For example, a grantor can provide that investments will only be distributed to beneficiaries upon reaching certain ages or milestones (like college graduation). This can help protect against an individual making poor financial decisions and quickly depleting their inheritance.
A trust can also be drafted to allow for discretionary distributions, where the trustee has some freedom in distributing funds. This can provide flexibility that is difficult to achieve in a will.
There are various ways to structure a trust, so it is essential to talk with an estate planning attorney who has experience creating these documents about what type of plan would be best for your situation. They can explain the benefits of trust and help you choose the right one to meet your goals. They can also help you understand the costs involved in establishing and funding a trust so that you have an accurate picture of your options.