The difference between a trust and a will is significant in terms of how they function, when they take effect, and their role in estate planning. Both are essential tools for distributing your assets, but they have different characteristics, benefits, and limitations. Here’s a breakdown of the key differences between a trust and a will:
1. Definition:
- Will: A legal document that outlines how you want your assets distributed after your death. It also names an executor who will manage the distribution of your estate and carry out your wishes.
- Trust: A legal arrangement where a trustee holds and manages assets for the benefit of the beneficiaries, either during your lifetime or after your death. The trust can specify how and when assets are distributed.
2. When They Take Effect:
- Will: A will only takes effect after your death. It’s essentially a plan for your probate assets after you pass away.
- Trust: A trust can take effect immediately once it is created and funded. In some cases, a trust can be set up to distribute assets both during your lifetime (known as a living trust) and after your death.
3. The Probate Process:
- Will: A will must go through the probate process, which is the legal process of validating the will and distributing assets according to the instructions in the will. You are essentially “probing” the title of the assets which are not already earmarked for distribution. This process is usually public, time-consuming, and can be expensive, especially if challenged by interested persons.
- Trust: A trust can generally avoid probate, which can save time, costs, and protect the privacy of the estate. Assets held in a trust pass directly to beneficiaries without needing to go through the court system. This assumes the trust/trustee’s actions are not challenged by beneficiaries and/or other interested persons.
4. Privacy:
- Will: Because a will goes through probate, it becomes a public record. Anyone can view its contents once it is filed in probate court.
- Trust: A trust may remain private. Since it doesn’t go through probate, there is no public record of the trust’s terms or the distribution of assets. Once again, this assumes a properly funded trust, and no litigation.
5. Control and Flexibility:
- Will: A “simple will” provides instructions on how assets should be distributed, but it doesn’t offer much flexibility once the person passes away. For example, a will can’t dictate how assets are managed after death or provide for situations where a beneficiary may not be able to handle assets responsibly. There are more complex wills, which may allow for flexibility, however, if considering a “complex will,” one must weight it against setting up a trust.
- Trust: A trust can offer more flexibility and control. It allows you to set specific conditions for asset distribution, such as delaying distributions to beneficiaries until they reach a certain age, or setting up distributions based on milestones like education or financial need. A trust can also be used to manage assets if you become incapacitated.
6. Incapacity Planning:
- Will: A will typically comes into play after death and does not address what happens if you become incapacitated.
- Trust: A trust can include provisions for incapacity. For example, if you become incapacitated, the successor trustee can step in to manage your assets without needing court intervention, avoiding the need for a guardianship or conservatorship. A power of attorney and health care directive are also commonly used in incapacity planning.
7. Complexity and Cost:
- Will: A will is generally easier and cheaper to create. It doesn’t require the transfer of assets into the will (as with a trust), and it can be written with the help of an attorney.
- Trust: A trust is more complex and requires transferring assets into the trust. While it can be more expensive to create and manage, it can offer significant benefits, such as avoiding probate and providing better control over asset distribution.
8. Asset Protection:
- Will: A will doesn’t provide asset protection from creditors. If your estate has outstanding debts, the assets will be used to pay those debts before being distributed to your beneficiaries.
- Trust: Depending on the type of trust (i.e., irrevocable trust), it can offer some protection from creditors. Assets held in an irrevocable trust typically are not considered part of your estate, meaning they may be protected from creditors or lawsuits.
9. Changes and Flexibility:
- Will: You can change or revoke a will at any time while you are alive, provided you have the mental capacity to do so. A will is typically updated when major life events occur, such as significant changes in the law, marriage, divorce, or the birth of children.
- Trust: A revocable trust can be changed or revoked during your lifetime, much like a will. However, an irrevocable trust typically cannot be changed or revoked once it is created, providing more permanent control over the assets.
10. Taxes:
- Will: A will does not affect your tax situation directly. However, your estate may be subject to estate taxes, depending on its size, when it goes through probate. There are tax apportionment clauses as well, which will apportion the responsibility of who pays the taxes (i.e., an estate or a beneficiary).
- Trust: Trusts, particularly irrevocable trusts, can have tax advantages. For instance, assets in an irrevocable trust may not be subject to estate taxes because they are no longer considered part of your estate. However, there are tax implications based on the type of trust, so working with an estate planning attorney is recommended to ensure proper tax planning.
Summary of Key Differences
| Feature | Will | Trust |
|---|---|---|
| Takes effect | After death | either during lifetime or after death |
| Probate required | yes | no |
| Privacy | public record (after probate) | private |
| Incapacity planning | no | yes |
| Cost/complexity | lower cost and simpler | higher cost and more complex |
| Control over assets | limited | more control, with conditions on distribution |
| Asset protection | no | yes, for certain types of trusts |
| Changes | can be easily changed or revoked | can be changed (if revocable), but not once irrevocable |
| Taxes | no specific tax advantages | potential tax advantages (depending on type) |
Which One Do You Need?
Both a will and a trust are important estate planning tools, and the right combination depends on your goals and personal circumstances:
- A will may be appropriate if you want a simple, straightforward way to distribute your assets after death and don’t mind your estate going through probate.
- A trust may be ideal if you want to avoid probate, maintain privacy, ensure your assets are managed in case of incapacity, and exercise more control over how and when your beneficiaries receive their inheritance.
For many people, having both a will and a trust is the best strategy. The will can address any assets which aren’t transferred into the trust (known as “pour-over” assets), potentially providing a way for one’s assets to be covered.
It’s advisable to consult with an estate planning attorney to determine which option(s) is best for your specific situation and goals. They can help create a comprehensive estate plan that meets your needs and ensures your wishes are followed.
