What’s the difference between a will and a trust?
No matter your age or financial situation, it is never too early to begin end of life and estate planning. Soon after you initiate your estate planning journey, you will almost certainly run into two crucial estate planning tools: wills and trusts. While you have probably heard both of these mentioned at some point in your life, you may be left wondering what, exactly, is the difference between the two. Although wills and trusts are both estate planning tools that allow for the protection of assets and the ability to bequeath said assets to heirs, the difference is when that protection kicks in.
A will is a written document expressing a deceased person’s wishes – its main purposes are to name guardians for minor children and bequeath objects and cash assets to family, friends, and/or charity. They commonly list assets, debts, heirlooms, safe deposit boxes, vehicles, and property. Testamentary wills also include a directive about how you want your funeral held. Wills are only active after death, unlike trusts, which are active the day they are executed.
A trust creates a fiduciary relationship in which a trustor gives the trustee the right to hold title to property and assets for the benefit of a third party beneficiary. Trusts offer much greater control than a will, but are generally more expensive and labor intensive to set up and manage. There are two main categories of trusts: irrevocable trusts, which cannot be changed after creation, and revocable trusts, which have the benefit of being able to be altered by the trustor after creation.
Revocable vs Irrevocable Trusts
Revocable trusts allow you to make a living document that can be updated to reflect your life and wishes at any given time. The document can be updated to account for marriages, deaths, children, and more. This flexibility is where a revocable trust truly shines. A revocable trust allows for the informal transfer of assets upon your death without the need for a probate.
Irrevocable trusts allow you to make far more detailed decisions about your estate, and offers more protection of your assets from people who wish to separate them from you, including ex-spouses and creditors. You can also set provisions for distributing assets to beneficiaries who may be less financially responsible than you would like, ensuring the longevity of your estate. Perhaps the most attractive aspect of trusts for estate planners however, is the tax advantage they can have over wills.
Pesky estate taxes, which in 2021 can run up to 40% on assets in the largest estates, do not apply to irrevocable trusts. Because these trusts effectively remove the benefactor’s right to ownership of the assets placed in the trust, the assets are removed from the benefactor’s taxable estate, removing the estate tax liability. This also means that the benefactor no longer has to pay tax on income generated by assets within the trust.
Drawbacks to an irrevocable trust
The biggest drawback to an irrevocable trust is the inability to update or modify the trust. A trustor is stuck with the language of the irrevocable trust even if there are changes in circumstances surrounding the trustor’s life, e.g. marriage, deaths, divorce, loss of employment, or other complications.
A major benefit of a will is the ease of creation and cost. Additionally, if you have minor children, you can nominate a guardian in the event that both parents die before the children turn 18. One major disadvantage of wills is that they must go through the probate process, during which a court administrator examines them. This process is often lengthy, and can get quite messy, especially if a family member decides to contest the will. Unfortunately, these legal complications can be costly, and can result in a significant portion of your estate falling into the hands of lawyers, rather than the intended recipients. Probate is less than ideal for families that value privacy, as wills become part of the public record when they go through the probate process.
Trusts, on the other hand, are not required to go through the probate process, and thus are not part of the public record. Trusts can only be contested in limited circumstances, making them a more reliable way to ensure your assets land in the hands you intended, and saving your loved ones from unnecessary infighting.
Regardless of if you need a trust, a will, or both, it is never too early to start estate planning. Planning for your future is imperative if you have minor children, so that you can name guardians and ensure a secure future should anything ever happen to you. Dying without a will (intestate) or trust causes the distribution of you assets and care of your children to be determined by the intestacy laws applicable in your state, leading to an added emotional and financial burden to your loved ones, who may be forced to spend time in long legal battles after your death.