You’ve likely heard of a will and understand its general use, just as you may have also heard of trusts somewhere in the same conversations about the distribution of assets or property. But do you know and understand the difference between the two? The terms are not simply different words to describe the same thing. In fact, understanding the distinctions between each and their common uses can be a valuable token of knowledge for you and your family.
So which might be best suited for you and your family’s future? To understand, we should start to break them down.
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What Is a Will?
A will is a legal document that outlines your wishes in the event of your death. Whether it’s untimely and unexpected or simply a matter of planning for the future of your family, a will can declare everything from whom you wish to take care of your children (if they’re still minors) to how your assets will be distributed among family and friends.
The most common form of a will that we’re familiar with is the testamentary will. This is when somebody signs a document with all their wishes in the presence of a witness/witnesses, depending on state law. However, oral wills, pour-over wills, and mutual wills are also common formats that can achieve the same results.
No matter the specific name or method, wills are intended to organize a person’s estate so that it can be passed on to pre-determined heirs, most often family, and not the state or just automatically to the “next of kin.” This gives you control of your belongings, your property, finances, and more once you have passed away.
What Is a Trust?
Similar to a will, a trust is another vehicle for assets to be transferred, most often from an elder to a younger family member as a form of inheritance. The trust itself is a legal arrangement that declares a trustee, who is employed to hold the property in place for the beneficiary over a determined amount of time.
For example, a person decides he would like to pass an inheritance on to his grandson, who is still a child. By establishing a trust, he can employ the parents (or whomever he chooses) as trustees, who will maintain and secure whatever assets are being inherited until his grandson is an adult (or any other determined period of time or condition).
Also similar to wills, there are several classifications of trusts — living or testamentary, funded or unfunded, revocable or irrevocable — and each can determine everything from the process that makes them legally binding to the costs associated with maintaining or establishing them.
The Key Differences Between a Will and a Trust
Wills and trusts each have their own benefits to those who employ them, but there are some key differences for each that can make one more preferential than the other, depending on your individual needs. For example:
–A Will Passes Through Probate
Wills typically pass through a process known as probate. This is a procedure in which a court gives permission for assets to be passed on to their heirs.
There are, however, ways in which probate can be avoided with some planning and preparation or depending on state law.
-Wills Only Go Into Effect After Death.
Since a will’s primary purpose is to declare how a person’s wishes will be carried out after their death, the document obviously doesn’t take effect until then (or until the owner of the will is incapacitated). A will is a document that directs who will receive your property at your death and appoints an executor to carry out your wishes.
–Trusts May Take Effect Immediately
Property can be distributed before death, at death, or afterward as determined in the trust itself. There is a distinction between a living trust which takes effect immediately and a testamentary trust that takes effect after the testator passes away.
-Each Covers Different Types of Properties
A will only covers the specific property a person owns (in their name only) at the time of their death. A trust, on the other hand, governs all property it’s been funded with, such as insurance policies, for example.
-A Trust Is Private
A trust is private, only applicable to those involved.
-Appointing Guardians:
A will allows you to appoint a guardian for a minor.
A trust does not allow you to appoint a guardian for a minor.
-Conservatorship:
A conservatorship can be avoided with a Durable Power of Attorney, which will allow you to appoint a person of preference to handle your finances in the event you become incapacitated.
A trust avoids a conservatorship. The successor trustee that you appoint will be responsible for transferring your property.
Do I Need Both?
In short, since wills and trusts are different vehicles for distributing property, having both is actually a smart choice, albeit not a necessity. Your living trust may not include certain property, for example, which a will can appoint a beneficiary to. In fact, the “pour-over” will is created specifically for this purpose, directing any remaining property into your living trust (it will have to go through probate in this instance).