A will and a trust are two legal documents that can be used to plan for the distribution of your assets after you pass away. Both wills and trusts can be used to name beneficiaries and to specify how your assets should be managed and distributed. However, there are significant differences between a will and a trust, and it is important to understand these differences in order to determine which option is best for you.
What is a will?
A will is a legal document that outlines how you want your assets to be distributed after you pass away. A will typically includes provisions for the appointment of an executor, who is responsible for carrying out the provisions of the will, and for the appointment of guardians for any minor children. A will can also be used to make charitable donations, to appoint a trustee for any trusts created under the will, and to specify any funeral or burial arrangements.
In order for a will to be valid, it must be in writing, signed by the person making the will (the testator), and witnessed by at least two people. A will becomes effective upon the death of the testator, and it must be probated, which is the process of proving the validity of the will and carrying out its provisions.
What is a trust?
A trust is a legal arrangement in which one person, called the settlor or grantor, transfers ownership of assets to another person, called the trustee, to hold and manage for the benefit of a third person, called the beneficiary. Trusts can be created for a variety of purposes, including to manage assets for the benefit of minor children, to provide for the care of dependents with special needs, and to minimize taxes and probate costs.
There are several types of trusts:
- Revocable Trust: A revocable trust is a trust that can be amended or revoked by the settlor at any time. This type of trust is often used to manage assets during the settlor’s lifetime and to avoid probate upon the settlor’s death.
- Irrevocable Trust: An irrevocable trust is a trust that cannot be amended or revoked by the settlor once it has been created. This type of trust is often used to protect assets from creditors or to minimize taxes.
- Special Purpose Trusts: Special purpose trusts are trusts that are created for a specific purpose, such as to manage assets for the benefit of minor children or to provide for the care of dependents with special needs.
- Charitable Trusts: A charitable trust is a trust that is created to benefit a charitable organization or to fund charitable activities. Charitable trusts can be either revocable or irrevocable.
- Special Needs Trusts: A special needs trust is a trust that is created to provide for the care of a beneficiary with special needs, such as a physical or mental disability. Special needs trusts are often used to preserve government benefits, such as Medicaid and Supplemental Security Income (SSI), for the beneficiary.
Difference between a trust and a will
There are several key differences between a trust and a will:
- Probate: A will must be probated in order to be effective, which is a legal process that involves proving the validity of the will and carrying out its provisions. A trust, on the other hand, does not have to go through probate in order to be effective. This can save time and money, as probate can be a lengthy and expensive process.
- Revocability: A will is revocable until the testator’s death, while a trust can be either revocable or irrevocable, depending on the type of trust. A revocable trust can be amended or revoked by the settlor at any time, while an irrevocable trust cannot be amended or revoked once it has been created.
- Effectiveness: A will becomes effective upon the death of the testator, while a trust becomes effective as soon as it is created and funded.
- Privacy: The probate process is a matter of public record, which means that the provisions of a will are open to the public. A trust, on the other hand, is a private document and the provisions of the trust are not made public.
- Asset protection: A trust can be used to protect assets from creditors and to minimize taxes, while a will does not have the same asset protection benefits.
Benefits and disadvantages of creating a trust
Benefits:
- Avoids probate: One of the main benefits of a trust is that it avoids probate, which can be a lengthy and expensive process. By placing your assets in a trust, you can ensure that they will be distributed according to your wishes without the need for probate.
- Provides asset protection: A trust can be used to protect your assets from creditors and to minimize taxes.
- Maintains privacy: Because a trust is a private document, the provisions of the trust are not made public. This can be beneficial if you want to keep your financial affairs private.
Disadvantages:
- Requires more effort to set up: Setting up a trust requires more effort than creating a will, as it involves transferring ownership of your assets to the trust.
- More expensive: Setting up a trust can be more expensive than creating a will, as it typically involves the services of an attorney.
- More inflexible: Once an irrevocable trust is created, it cannot be amended or revoked, which can make it less flexible than a will.
Benefits and disadvantages of a will
Benefits:
- Simplicity: A will is a relatively simple document to create, and it can be done without the assistance of an attorney.
Disadvantages:
- Requires probate: A will must be probated in order to be effective, which can be a lengthy and expensive process.
- Lacks asset protection: A will does not provide the same level of asset protection as a trust, and it does not minimize taxes.
- Lack of privacy: The provisions of a will are open to the public during the probate process, which can be a disadvantage if you want to keep your financial affairs private.
When do wills and trusts take effect?
A will becomes effective upon the death of the testator, and it must be probated in order to be effective. A trust becomes effective as soon as it is created and funded, and it does not have to go through probate.
What property can be inherited through wills and trusts?
Both wills and trusts can be used to distribute any type of property, including real estate, personal property, and financial assets such as stocks and bank accounts.
How mental disability affects wills and trusts
Wills take effect only after you pass away and are not impacted if you are unable to make your own decisions by mental disability or incapacitation. Revocable living trusts, can include provisions for disability or incapacitation and take effect as soon as they are signed. These trusts allow you to transfer property and assets while you are still alive.
Can you have both a will and a living trust?
Yes, you can have both a will and a living trust because they serve different purposes. A living trust provides for the management and distribution of your assets during your lifetime and after your death. A will, on the other hand, allows you to name guardians for your children, appoint an executor for your estate, and declare your final wishes. It is important to understand the type of will to have with a living trust in order to have a comprehensive estate plan.
If you die without a will
If you die without a will, it is called dying “intestate.” When this happens, your assets will be distributed according to the laws of your state of residence, which may not be in accordance with your wishes. If you have minor children, the court will appoint a guardian for them, which may not be the person you would have chosen.
Do wills require probate?
Yes, a will must be probated in order to be effective. Probate is the legal process of proving the validity of a will and carrying out its provisions. During probate, the will is filed with the probate court, and the court appoints an executor to manage the estate and to distribute the assets according to the provisions of the will.
Bottom Line
A will and a trust are two legal documents that can be used to plan for the distribution of your assets after you pass away. Both wills and trusts have their own benefits and disadvantages, and the decision to create a will or a trust, or both, depends on your individual circumstances. It is important to consider the size and complexity of your estate, your goals for asset distribution, and your age and health when deciding which option is best for you. It is also important to review and update your will or trust periodically to ensure that it reflects your current wishes.
