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Wills and trusts are legal instruments that ensure assets are passed down to heirs as per your wishes, helping to provide for the people and causes close to your heart. While each can be a pillar of estate planning, wills and trusts have key differences to consider, from when they take effect to whether or how much they can be contested. Depending upon your situation, you might need only one or the other, but some people end up using both to help achieve different outcomes.
We’ll cover the ins and outs of wills and trusts, including the different types of each, as well as when you might need one or both. Here’s an overview of the key differences with more details explained below.
Wills vs. trusts: Key differences
After one's death.
Once signed and funded.
Protection during incapacity
Provides guardianship for minor children?
Process and costs
Straightforward process. Average cost ranges from $0 to $1,000, depending on the complexity and size of the estate and how it is created (DIY, online, via an attorney).
More complex process, with more paperwork. Average cost for a simple trust is up to $1,500. Complex trusts have an average cost of around $3,000.
More likely to be successfully challenged.
Less likely to be successfully challenged due to its ongoing nature.
Usually secondary to trusts.
Generally take precedence over wills.
Protection from creditors
What is a will?
A last will and testament, or will, is a legal document that designates how to manage your assets upon your death. When establishing a will, the creator, known as the testator, must be an adult of sound mind. The testator elects an executor or executrix to handle estate affairs upon the testator’s death. Distribution of an estate can include guardianship of minor children or pets, dole property and assets out to beneficiaries, implement funeral arrangements and more.
Any asset that is held in a single name can be directed by your will. Assets owned jointly, such as “joint tenancy with rights of survivorship,” or JTWROS, accounts will transfer immediately to the surviving co-owner upon your death.
Each state has its own rules for wills; however, most require that a written will is signed or executed by the testator along with two witnesses before it becomes legally binding and effective.
Types of wills
There are several types of wills, including:
Simple or testamentary will. A last will and testament or legal document that stipulates how to distribute your assets upon your death.
Joint or mirror will. A last will and testament that fuses together the individual wills of more than one person. One common example: spouses who leave everything to the surviving spouse and then to their children.
Handwritten or holographic will. A will written by hand, without being witnessed or notarized. Its validity and requirements vary by state. A common example: Someone writes their wishes entirely on pen and paper to save on legal costs or due to a dire, life-threatening situation.
Oral or nuncupative will. A will orally spoken to witnesses, instead of being written. Its validity and requirements vary by state. An example: Someone states their wishes aloud when they are terminally ill and unable to write them down.
Pour-over will. A legal vehicle often used as a contingency or catch-all alongside a living trust. It directs everything in one’s estate over to the living trust in case assets were not moved into the trust beforehand. For example, if a home was removed from the trust during a refinance and never retitled back into the trust, a pour-over will take care of transferring the home back into the trust.
Living will. A living will is not related to your last will and testament or any of the wills defined above. Instead, a living will stipulates your medical care preferences in the event you are unable to speak for yourself.
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What is a trust?
Creating a trust forms a separate legal entity and fiduciary relationship, whereby the creator of the trust, known as the grantor, is able to hold assets for his/her own benefit or for a third party, the beneficiary(ies). The grantor can select a successor trustee to manage the trust if the grantor becomes unable to do so or dies.
With trusts, the grantor has greater control and can outline specific rules or conditions for how assets will be distributed. For instance, if parents want their children to inherit income only at certain times or look after a child with special needs, these wishes can be accomplished through a trust.
Note that you cannot designate guardianship for minor children in a trust, only in a will. This is one common reason why some people use both wills and trusts together.
Types of trusts
There are different types of trusts, including:
Living trust, inter vivos trust, revocable trust or revocable living trust. An amendable legal document that allows the grantor to create a separate legal entity, the trust, and retitle assets in the name of the trust during their lifetime. The grantor designates a trustee to manage those assets on behalf of the grantor or named beneficiaries.
» MORE: Do I need a living trust?
Testamentary trust. A trust created by the terms of your will, after your death. Your will determines the guidelines of your testamentary trust. For example, a will may stipulate that a trust be created to help care for minor children until they turn 25 years old.
Irrevocable trust. A trust that is unable to be changed and removes assets from one’s taxable estate. There are various types of irrevocable trusts used to avoid the estate tax hit, such as a grantor retained annuity trust, or GRAT; spousal limited access trust, or SLAT; or qualified personal residence trust, or QPRT. One example: A second home’s value would trigger estate tax, so you put the home into a QPRT. You can still live in the home without paying rent for a specified period of time and then the home passes directly to your heirs.
Charitable trusts. Irrevocable trusts set up to disburse all or a portion of an estate for philanthropic purposes and to benefit from certain tax treatment. Common charitable trusts include a charitable remainder trust, or CRT, and charitable lead trust, or CLT. An example of a CRT is when someone has a greatly appreciated stock or asset. If the asset were to be sold, the owner would face a significant tax bill. By using this asset to fund a CRT, the owner benefits from a tax break upon funding and when the asset is sold by the charity, the transaction is tax-free.
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Key differences between wills and trusts
While both wills and trusts are estate planning vehicles to assist in handling your affairs, there are key differences to understand before deciding if one, or both, works best for your situation.
A will does not go into effect until after you die, whereas a living trust is active once it is created and funded.
This means that a trust can provide protection and direct your assets if you become mentally incapacitated, something a will is unable to do.
Probate and privacy
Whether you die without a will (called "intestate") or with a will, your estate will go through probate. This means that a probate court must confirm your will and allow your executor to distribute assets as per your will’s instruction. In some states, probate can be a lengthy, drawn-out process and involve hefty costs. Without a will, there are usually even more hoops to jump through along with additional time and cost. In all states, probated wills become public record, which means that anyone is able to check out the details of your will.
If you seek privacy for your personal financial affairs, a living trust could be a good solution. In addition to preserving your privacy, the ability to avoid probate could potentially result in a smoother transition of assets to heirs.
Complexity and cost
Trusts can be complex and require more paperwork to establish, which means they are generally more costly to prepare upfront than wills. However, avoiding probate down the road can offset the cost to set up a living trust.
For a living trust to work as intended, it needs to be funded, which means that the various assets housed in the trust — property, accounts (investments, retirement, banking), etc. — must be properly titled to be in the name of the trust. Many times, an estate planning attorney will provide directions upon completion of the legal documents to guide you on how to fund the trust and name the correct beneficiaries for each asset type.
There can also be more complications when dealing with assets held within a living trust. For instance, it can be difficult to refinance property inside a trust. Some lenders just review the living trust agreement, while others may make the grantor remove the property from the trust during the refinancing process.
Because of a trust’s complexity and cost, sometimes living trusts end up not being updated as frequently as they ought to be, whenever a significant life change comes along.
Precedence and contestability
Though both wills and trusts are legal documents to manage your estate, they are created under different laws. Trusts fall under contract law, and wills under testamentary law. Contract law is held to a stricter standard than testamentary law, which means that a living trust generally supersedes a will.
Since living trusts are effective once signed and funded, and can be updated over the course of the grantor’s life, whereas wills go into effect only upon death and are formed at a single point in time, living trusts typically take precedence due to their ongoing nature.
This means that wills are more likely to be successfully challenged because it can be more easily argued that the will is outdated or was made at a time when the individual was not of sound mind or was under the influence of someone else.
A living trust establishes a separate legal entity, and trust assets bypass probate, so technically those assets are no longer part of the grantor’s estate. Furthermore, since living trusts are more complex to set up, usually an estate attorney is involved so this also supports the validity of the trust.
Note that there are assets that pass through beneficiary designation, such as retirement accounts (401(k)s and IRAs); life insurance policies; annuities; assets earmarked with a transfer on death, or TOD, or payable upon death, or POD, and that beneficiary designation overcomes both wills and trusts.
Creditors are able to claim against both wills and living trusts. With revocable living trusts, the grantor is still considered the owner of the trust’s assets even though a separate entity is formed because the trust can be altered at any time. Though often it is harder to claim against a living trust compared with a will, only an irrevocable trust can guard assets from creditor claims.
If your net worth is significant, you may need to pay attention to estate tax with both wills and living trusts. For 2021, the federal estate tax exemption is $11.7 million (or $23.4 million for a married couple). This means that any assets above that exemption will be subject to federal estate tax, which can be up to 40% depending on the taxable amount, and subject to state estate tax as well.
However, the estate tax exemption can change and adjust with time. For those concerned that they might be impacted by estate tax at some point, this is where an irrevocable trust could make sense as it removes assets from your estate in an effort to reduce your future tax burden.
What makes sense for you?
When it comes to deciding which estate planning tool, or combination of tools, works best for you, understanding the differences between the various types of wills and trusts can help make a more clear-cut decision. Most people need a will, but not everyone requires a trust.
If you aren’t sure, consulting with an estate planning attorney — often with input from your tax advisor and financial advisor — can provide a second opinion on how best to achieve your estate planning goals while highlighting any details you might not have considered.
Though planning for how to pass assets on after your death might not be pleasant to think about, fleshing out your intentions means that your family and friends can execute on your behalf without second-guessing during an emotional time. It is one of the best gifts you can give to your loved ones and to yourself, as you’ll gain peace of mind knowing that those you care about will be well looked after.
This article is meant to provide background information and should not be considered legal guidance.