When it comes to planning your estate, you might be wondering whether you should use a will or a trust (or both). Understanding the similarities and the differences between these two important documents may help you decide which strategy is better for you.
What is a will?
A will is a legal document that lets you direct how your property will be dispersed (among other things) when you die. It becomes effective only after your death. It also allows you to name an estate executor (or personal representative) as the legal representative who will carry out your wishes.
In many states, your will is the only legal way you can name a guardian for your minor children. Without a will, your property will be distributed according to the intestacy laws of your state and a court may choose whom to appoint as guardian should your will not accomplish this. Keep in mind that wills and trusts are legal documents generally governed by state law, which may differ from one state to the next.
What is a trust?
A trust document establishes a legal relationship in which you, the grantor or trustor, set up the trust, which holds property managed by a trustee for the benefit of another, the beneficiary. A revocable living trust is the type of trust most often used as part of a basic estate plan. "Revocable" means that you can make changes to the trust or even end (revoke) it at any time. For example, you may want to remove certain property from the trust or change the beneficiaries. Or, you may decide not to use the trust anymore because it no longer meets your needs.
A revocable living trust is created while you're living and takes effect immediately. You may transfer title or "ownership" of assets, such as a house, boat, automobile, jewelry, or investments, to the trust. You can add assets to such a trust and remove assets thereafter.
Note that an irrevocable trust – while still containing the general concepts of trustee and beneficiaries – differs significantly in purpose than a revocable trust. While countless articles have been written about irrevocable trusts, irrevocable trusts often are created by attorneys to help minimize estate taxes, provide asset protection, and help provide privacy.
How do they compare?
While both a will and a revocable living trust enable you to direct the distribution of your assets and property to your beneficiaries at your death, there are several differences between these documents. Here are a few important ones.
- A will generally requires probate, which is a public process that may be time-consuming and expensive. A trust may avoid the probate process. However, in many states, probate may not be unduly burdensome, especially for small estates.
- In order to exclude assets from probate, you must transfer them to your revocable trust while you're living, which may be a costly, complicated, and tedious process.
- Unlike a will, a trust may be used to manage your financial affairs if you become incapacitated. (Note that a durable powers of attorney are also drafted to help someone else manage your financial affairs should you become incapacitated.)
- If you own real estate or hold property in more than one state, your will would have to be filed for probate in each state where you own property or assets. By creating a revocable living trust and funding the trust with such assets, this may help avoid probate in the other state (often called “ancillary probate”), helping to minimize costs of estate administration.
- In a will, you can name a guardian for minor children or dependents, which you cannot do with a trust.
- A trust may provide more privacy than a will as the will may be part of public record.
Which is appropriate for you and your family?
The decision isn't an "either/or" situation. Even if you decide to use a revocable living trust, you should also create a will to name an executor, name guardians for minor children, and provide for the distribution of any property that doesn't end up in your trust. Such a will is typically called a “pour-over will” in that the estates passing through the will “pour over” to the trust. The trust’s dispositive terms then control who receives the assets and in what manner. Note that a will, even without being paired with a revocable living trust, can create testamentary trusts – trusts that spring up at your death. These testamentary trusts can then provide for protection of the assets for your beneficiaries in a manner that you spell out and created by your attorney.
Whether you incorporate a trust as part of your estate plan depends on a number of factors. Does your state offer an informal probate, which may be an expedited, less expensive process available for smaller estates? Generally, if you want your estate to pass privately, with little delay or oversight from a probate court, including a revocable living trust as part of your estate plan may be the answer.
Tip of the iceberg
There are obviously many more issues related to your estate that you should address with your attorney. Your estate should be customized for you based on the nature of your family, intended heirs, amount and type of assets, and – most of all – your goals and concerns. The decision on whether to incorporate a revocable living trust into your estate plan is just one of many issues that you should address with your attorney (who would provide the legal and drafting expertise) and Certified Financial PlannerTM (who could add to the overall, integrated discussion about your planning needs).
Modified by Oasis Wealth Planning Advisors with initial preparation by Broadridge Investor Communication Solutions, Inc. Copyright 2017.