What is the difference between a will and a trust? This question has been coming up more often lately and it’s a good thing. People are becoming aware that estate planning is essential to their family’s well-being. We will discuss a few important differences between a will and a trust in this article.
1 Execution Timeline
The first difference between a will and a trust is the execution time. In order to explain this, we must first define what a will and a trust is.
- A will is a legal document that tells the courts a person’s wishes on how they want their property to be distributed at the time of their death.
- A trust is a legal arrangement between a person (the “grantor”) and another person (the “trustee”) to administer property for the benefit of another person (the “beneficiary”). In some cases, the grantor, trustee and the beneficiary is the same person. The trust goes into effect immediately.
Living Revocable Trust
There are many types of trusts. However, a Living Revocable Trust is usually right for most people. Therefore, this is the type of trust we will be comparing to a will today. Let’s highlight some of the benefits of a Living Revocable Trust:
“Living” means that you will be able to use and maintain control over your assets while you are alive.
“Revocable” means that you can change the rules that you set for the governing of your trust at any time.
There is often a misunderstanding that once you establish a trust, you no longer have control over your assets. A Living Revocable Trust allows you to have complete control over your assets as the trustee. Additionally, you can appoint a successor trustee. This is important because if you were to become incapacitated or died, the successor trustee can step in immediately, without needing a court order.
The second difference between a will and a trust is whether or not your beneficiaries will avoid probate. You may have heard some of the horror stories of friends or family members that had to go through the probate process. Most people assume that having a will alone allows their beneficiaries to bypass probate . This is incorrect… but what exactly is probate and why is it best to avoid it?
Probate is the judicial process, where your last will and testament is first proven to be true and valid by the court. Upon being proven, your wishes can now be overseen and administered by the courts. The courts will oversee everything from settling your debts to deciding when your beneficiaries will finally receive distributions from your estate .
A Waste of Time and Money
The probate process can take up to 18 months in some states, like California. It is also quite costly. If you only have a will or no will at all, your beneficiaries will have to go through probate in every state you own property. Thus, costing them even more time and money. Keeping in mind, that during the probate process your family does not have access to any of your money. Therefore, this can be a very stressful situation for them.
Privacy vs Full Disclosure
If that wasn’t enough to make you cringe, imagine that you passed away and anyone can go to the courts and look up what you owned and what was distributed to your beneficiaries. How annoying would that be? Well, that’s exactly what happens when your estate goes through probate. After your estate is settled in court, your assets and who those assets were distributed to are documented and filed with the court, making the details of your estate public knowledge. Anyone can now access that filing.
Now that we have discussed what probate entails, you may be thinking that you would never want to put your loved ones through this and you would be right for wanting to spare them. The solution would be to create a living revocable trust. This will allow your beneficiaries to bypass the probate process, if done correctly. Furthermore, the administration and/or the transfer of assets would be a private matter. The only people that would be privy to the details of the trust would be the grantor, the trustee and the beneficiaries.
3 Protection for your Beneficiaries
Another difference between a will and a trust is the protections each one provides for your loved ones. We will cover three types of protections:
- Protection from Creditors
- Protection for Beneficiaries with Disabilities
- Protections for Minor Beneficiaries
Protection from Creditors
When your assets are moved into the trust, they are now owned and managed by the trust. When you pass away these assets remain in the trust unless you decide otherwise. This provides protection for your beneficiaries from creditors and even ex-spouses because the assets are kept out of the name of your beneficiaries. However, they will still be able use the assets according to the rules you set for the governing of the trust. Additionally, you can allow your beneficiaries to serve as trustees, so that they may manage their own inheritance.
In contrast, if you left their inheritance to them via a will, your assets would now become apart of their estate after your death. When this happens, they no longer have creditor protection and can be taken to the cleaners. Sadly, this is all too often the outcome for people that own assets in their name. Establishing a trust will ensure that your assets are kept safely in the family and passed down to your future generations.
Protection for Beneficiaries with Disabilities
If you have a child, grandchild or other beneficiaries that receive government assistance because of their disabilities, a trust is an absolute must. Leaving assets to a beneficiary that relies on on these benefits, may put them in a position where they are no longer eligible to receive help from a government assistance program, like Social Security or Medicaid. Unless the amount of assets you are leaving them far exceed what they would need over their lifetime, it is best to hold those assets in a trust, so that they can continue to receive their benefits. Furthermore, the trust can pay for expenses that are not covered by the government assistance program, which are often limited. A will does not offer any protections for your beneficiary in this scenario.
Protection for Minor Beneficiaries
The law provides that a minor does not have the legal capacity to manage any assets. Therefore, if you left a will that leaves money directly to your minor beneficiaries upon your death, the court would need to appoint someone to manage that inheritance on behalf of your children. That person is called a conservator. A conservator can be the surviving parent, relative, family friend or someone chosen by the courts.
When the minor turns 18, he or she will receive all of the inherited assets and will be free to do with them as he or she wishes. How bad could it be?… you were 18 once. I’m sure you have a pretty good idea.
Creating a trust to receive and manage the inherited assets is the best way to ensure that the court is not involved in your family’s affairs. You will also be able to determine who will serve as the conservator for your minor beneficiaries without needing court approval. Thus, avoiding unnecessary court management fees. Lastly, your beneficiaries will be able to use the assets based on the guidelines you put in place to govern the management of these assets. You can set guidelines like at what age would you like them to receive a portion of their inheritance etc.
4 Reduce Estate Tax and Inheritance Tax
The fourth difference is the reduction of estate tax and inheritance tax. Currently, the federal government estate tax at your death (if you were to die in 2020) is only imposed if your taxable estate is worth more than $11.58 million (this threshold is subject to change). However, some states have their own estate tax, separate from the federal tax. In addition, some states also have an inheritance tax, which your beneficiaries pay based on the value of the inheritance left for them. The awesome news is that none of the states with these additional taxes collect them on what you leave to your spouse. As with the federal tax, you can give your spouse everything you own without any tax coming due. This is often done using an ” I Love You Will” (ILUW), which is simply leaving all your assets to your spouse in the case of your death.
I know that you truly love your spouse because you wouldn’t be leaving everything to them, if you didn’t. However, leaving an ILUW only creates tax challenges for them down the road. Let’s say that you were to leave your spouse a substantial estate…$2-$5 million perhaps. When your spouse dies, if they haven’t remarried, they will have not be able to pass on their assets to their beneficiaries without incurring significant amount in tax. Additionally, if your spouse accumulated wealth of their own, they could end up paying a higher rate because the assets you left them is now a part of their total estate.
On the other hand, placing your assets in a trust will allow your spouse to use the assets without actually inheriting them. When he or she dies, the assets pass from the trust to his or her heirs without ever becoming part of his or her estate. As a result, you can reduce estate tax and inheritance tax both now and in the future!
Estate planning for an estate of this magnitude is not a simple task. It is best to consult a reputable estate attorney when creating your trust.
5 Present Cost vs Future Savings
A will is less expensive to set up in the short term. However, having your assets in a trust will save your beneficiaries a lot of money in the future. Through my research, I have seen wills start as low as $150 for DIY (Do-It- Yourself Wills) up to $1,000 for more complicated estates. Trusts can start at about $1,200. Although, it may seem logical to just go with the will, you have to consider the future cost which would guarantee probate fees, estate tax, gift tax etc.
After, learning about the differences, you are probably thinking that a trust is the way to go. You would be only half right! My recommendation would be to have both, a will and a trust. You can place your assets in your trust for safe keeping. However, a will is an absolute must if you have minor children. In your will is where you will state who you would like to continue the care of your minor children in the event of your death or incapacitation. In addition, you can outline your funeral wishes and who you would like to leave each keepsake for. They both necessary for your estate planning.
I hope you found this article useful. For more information on Wills and Trusts visit our blog.
This article is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of the author, and have not been evaluated by a lawyer for accuracy, completeness, or changes in the law.