Wills and trusts both provide instructions on who will receive your assets. While there are many similarities between the two, there are also several differences, and it’s important to understand the advantages and disadvantages both offer.
A will is a legal document that takes effect after you die, whereas a trust is a legal arrangement that protects your assets and instructs how they can be used both during life and after their creators die. Both wills and trusts are effective for estate planning.
Read on to learn more about which tool can be most effective for you.
Exploring the pros and cons of a trust
Unlike a will, which only takes effect upon the death of its creator, a trust is effective immediately upon being signed and funded. What is a trust? A trust is a legal arrangement that outlines the transfer of assets from an owner, called the trustor or grantor, to someone who is the trustee. A trust sets out the terms for how the trustee will manage and distribute the assets held within the trust, which must be in the best interest of the beneficiaries.
Let’s first look at the advantages offered by a trust.
Pros
Trusts offer many advantages, including:
- Increased flexibility
- The ability to dictate how your assets will be distributed and used before you die
- Avoiding probate
A trust can offer greater control over how and when your assets are distributed compared with a will. Trusts also come in many different variations and types, allowing you greater flexibility.
Many people choose to place their assets in a trust rather than a will, as trusts allow you to minimize or avoid probate, which is one of their greatest advantages. Probate is the process of going to court to verify that the person who wrote the will has actually passed away and that their will is valid. With a trust, you can avoid all of this and potentially save on legal fees and time.
Another great benefit to a trust is that you can use it to outline how your assets will be distributed and used before you die. For example, a trust allows you to make provisions for what would happen to your assets should you become mentally or physically unable to make legal decisions on your own behalf. Through a trust, you can make your wishes known and see them play out before you pass, which can be rewarding and reassuring, removing any doubt.
Cons
As with any legal arrangement, there are potential disadvantages to trusts. When comparing wills to trusts, these include the fact that a trust:
- Can be more complex to set up
- Can cost more to set up
- Can potentially remove control of your own assets while you are still living
One of the main disadvantages of trusts is they can be more complex to set up compared to a will. Because of this, setting up a trust can potentially be more costly than creating a will, but not always.
In addition, if a trust is not set up in accordance with your wishes, it can potentially remove the control of your own assets while you are still alive. When structured according to your needs, a trust can be a very useful tool. Always understand what you are creating and signing.
Types of Trusts
Trusts come in many different types, each with its own use described below.
Revocable Trust
- Can be amended, altered, or terminated at any time
- Can be managed by the grantor
- Can be transferred to a second trustee
- The grantor pays tax on the assets in the trust.
A revocable trust can be amended, altered, or terminated at any time. In essence, you can change and end this trust when you wish. A grantor of this type of trust can serve as its trustee and continue as the trust’s owner for tax purposes.
The assets included in a revocable trust are considered to be part of the grantor’s taxable estate because the grantor retains control of the trust while they are still alive. If you set up this type of trust, you continue to pay tax on the assets you place within it while you’re living because you are still in charge of them.
A revocable trust can name a successor trustee. This person can take charge of the trust when a grantor-trustee dies or becomes disabled. The trust can include instructions on how the assets within it will be managed and transferred to this second person.
Irrevocable Trust
- The grantor gives up ownership of their assets.
- The trust is managed by someone other than the grantor.
- The trust may protect assets from the grantor’s creditors.
- The assets are not considered taxable income for the grantor.
In contrast to a revocable trust, an irrevocable trust requires the grantor to give up ownership of their assets once established. Irrevocable trusts are managed by a trustee who is not the grantor, and once this type of trust is set up, the grantor cannot control or change the trust.
One of the benefits of establishing an irrevocable trust is that if the grantor is experiencing trouble with creditors and the assets within the trust are transferred properly, these assets could be protected from creditors.
If the grantor of an irrevocable trust gives up all control of the assets in the trust, any income generated by these assets won’t be considered as taxable income for the grantor. So, the assets won’t be included in the grantor’s estate.
Charitable Trusts
- Assets are used to provide regular payments to charities.
- Once the trust’s term ends, assets are distributed to other beneficiaries, such as family.
Most people are looking for a way to pass their assets down to loved ones and heirs once they die when considering whether to set up a trust or a will. Sometimes, trusts are established for a different reason, however. “Special needs” trusts can be set up to support a charitable cause or to support an outstanding family situation.
Charitable trusts are a bit complicated and come in different subvarieties. There are special tax benefits for some irrevocable trusts that benefit charities that allow for the grantor or beneficiaries to gain. Once a charitable trust is established, assets are transferred to it, which are then used to provide regular payments to charities. Once the term for the trust ends, any remaining assets are allocated to beneficiaries beyond these charities, such as family members. A specific type of charitable trust called a charitable remainder trust will have the remaining funds distributed to one or several charities once the trust’s term expires.
Special Needs Trusts
- Can be used to support a disabled person
- Must meet complex tax laws
A trust can be created to help support a person with disabilities. This type of trust allows a disabled person to continue to receive financial support from government-funded public assistance programs while receiving financial support from the grantor of the trust (friends, family, or others). A special needs trust must meet complex tax laws and legal requirements, and a legal expert with special knowledge in this field is required for its setup.
Examining the benefits of having a will
When approaching trust versus will decisions, it’s important to consider your needs and those of your heirs. Like a trust, a will is a document that outlines how your assets are to be distributed among your heirs and beneficiaries. Unlike a trust, however, a will only comes into effect after your death.
A will brings many benefits with it that allow you to create a lasting legacy according to your wishes.
Peace of mind and protection
One of the major benefits of a will is that it outlines decisions for your heirs and beneficiaries, helping them to avoid disputes over your assets after your pass away.
A will allows you to:
- Name a guardian for your children and pets
- Specify any final arrangements, such as a funeral or burial
- Name an executor of your will
- Direct an executor to create a trust to hold assets for minor children
Without a will, decisions related to these issues might not play out according to your vision. No one wants to think about an unexpected death that leaves behind minors and pets, for example. If you have children, however, naming a person or persons as guardians for them before they reach maturity can help protect their way of life, living environment, and social upbringing.
Reduced conflict
Communicating your final wishes regarding a funeral or burial to your loved ones helps ease the burden that can be faced upon your death. Making these decisions beforehand can help ease the cost and challenges delivered to family and friends and provide for a smoother, more seamless process.
A will needs to be signed and witnessed and requires a legal process to be implemented. In the U.S., your will must be filed with the probate in your area, and it becomes publicly available as part of their records once it’s submitted. The instructions in your will must be carried out by the executor you designate, and the contents of the will have the final say in any disputes among beneficiaries.
The ability to disinherit
In some particular situations, parents may choose to disinherit their children. Children have a legal right to inherit their parents’ assets, but a will allows you to disinherit if you feel this is applicable. In some locations, it is also possible to disinherit a spouse. Contacting an estate lawyer in your area can help you learn more about the laws in your geographic location.
Do I need a will?
Even if you have just a few assets limited to savings in a bank account and a home, you want to ensure the right people become their owners once you pass. Without a will, all decisions related to who will inherit your assets and care for your children or pets will be made by the probate court in your jurisdiction. The court isn’t well informed on matters pertaining to your personal family life and might not understand the need to divide your assets unequally, as may be prudent, depending on your situation. For example, one of your heirs may be well established financially already, and another may not be. You may choose to divide your assets in an unconventional way because of this, which is a matter the court won’t consider without a will.
In addition, without a will, a surviving spouse, partner, or friend can apply to be appointed as the administrator of your estate, but the court might not agree with this. Their appointment won’t necessarily occur. Having a will with a designated executor guarantees your chosen leadership.
Finally, having a will can reduce the court fees your loved ones will be required to pay for the court to deal with your estate.
The role of an executor in estate planning
An executor of an estate is appointed to administer your wishes after you have died. Their main role is carrying out the instructions outlined in your will or trust once you pass away and ensuring your assets are distributed as you wish to your heirs and beneficiaries.
An executor must:
- Account for all assets in a will
- Transfer these assets to the correct parties
- Estimate the value of the estate
- Pay off all the debts of the deceased, including taxes
An executor is named by either the person who creates the will or by a local court when no executor is appointed in a will. It’s common to choose an executor for your will and appoint them before death. It’s important for the executor to realize they could be called upon at any time to fulfill their duties and that they are legally obligated to meet the wishes and instructions outlined in the will.
Anyone can be appointed as an executor who is over the age of 18 and who has no prior felony convictions. It helps if the person has experience as an accountant or a lawyer, as their professional skills will likely come into play.
Naming coexecutors
Some families name multiple children as coexecutors of a parent’s will in order to avoid showing favoritism. This can work, but it can also bring forth problems. It may be difficult for all executors to work together seamlessly, especially if some people live far away and lack the financial ability to deal with creditors and handle tax matters. Having a sole executor can potentially make the process easier.
Tips on how to choose between a trust and a will
Choosing between a trust and a will comes down to your personal financial and family situation. Both a trust and a will can be beneficial and work well when it comes to allocating and dividing your assets. Estate planning can be complex, however.
In simple terms, if your estate is relatively straightforward and small, a will may be the most cost-effective and efficient solution. Larger estates often benefit from using both a will and trusts in complementary relationships. Trusts can be more costly than wills as they entail greater legal fees, and you will need to pay to transfer property titles to the trust, but they can be advantageous.
So-called “living trusts” allow for the transfer of your assets without the cost of probate and allow grantors to maintain more privacy. Trusts aren’t presented publicly as wills can be, and they can be useful for passing down different values of assets to various heirs in a confidential manner.
Consulting a professional on matters pertaining to your estate planning can be invaluable and help you make the best decisions for you and your heirs.