Wills vs Trusts: The Key Differences Explained

Comparing wills vs trusts to manage an estate? Discover the advantages of each estate planning tool and gain insightful knowledge to protect your finances today!
Living Will

When it comes to safeguarding your family’s future, estate planning is non-negotiable.

Two key components often come up in estate plans: Wills vs Trusts. But you might wonder: which is right for my situation? It’s a question that weighs on the minds of many, especially those of us with a house, some retirement funds, and a child to provide for. Deciding between Wills vs Trusts doesn’t have to feel overwhelming. You’ll learn the basics of both so you can choose what best fits your needs and start securing your family’s financial well-being today.

Table of Contents:

Understanding Wills

Let’s start with wills, the cornerstone of many estate plans. It’s a straightforward legal document, a roadmap for what you want to happen to your stuff — house, retirement accounts, credit cards— after you pass away. Basically, you get to call the shots even when you’re gone, leaving instructions on who gets what.

The Purpose of a Will

Within the context of estate planning, it is important to use a will to: name guardians for your minor children, state your wishes regarding your funeral and burial, designate an executor who will be in charge of distributing your assets as instructed in your will, and provide instructions about how your property will be divided.

Imagine your child is still young when you’re gone; your will can name a trusted guardian to care for them and their inheritance. It’s about creating that safety net for your loved ones.

This ensures that the probate court distributes your estate according to your wishes, known as “testate” succession. “Testate” succession ensures that a deceased person’s wishes regarding asset distribution are documented in their will and legally enforceable by the probate court after they die. Dying without a will can cause confusion and conflict among family members about how to distribute an estate, this is known as “intestate” succession, in which the laws of the state dictate who gets your stuff.

The Probate Process

Here’s the thing though. A will needs to go through the probate process , a court-supervised proceeding that confirms its validity and ensures its instructions get carried out. This involves: validating the will in the probate court, appointing an executor or personal representative to manage the estate (if not already named), identifying and inventorying the assets in your estate, appraising the value of the estate’s assets, paying off any debts and taxes, and finally, distributing remaining assets to your beneficiaries. This probate court process can take several months or longer. But that’s not all. In the probate process, a will becomes part of public record. So, if you value privacy, keep in mind that anyone can see who gets what when the process is complete.

Diving into Trusts

A trust works differently because it allows you to move the legal ownership of your property, investments, life insurance, real estate, small business or other assets into a trust account during your lifetime. Someone, called a “trustee”, is in charge of managing the account and then distributes it as instructed by the trust document after your passing. A revocable trust allows you, as the “grantor”, to manage your trust account during your lifetime, meaning you can modify it at any time.

You can even choose to transfer your assets back to you. For instance, if you decided to set up a trust to protect a child’s inheritance but they reached adulthood and are responsible enough to manage their own finances.

However, if your estate is worth more than $13.61 million — which, let’s face it, isn’t most of us — establishing a revocable trust won’t protect it from estate taxation. The 2024 federal estate tax exemption is $13.61 million for a deceased person, although this amount changes with inflation.

But unlike a will, a trust sidesteps probate, which saves time and allows your beneficiaries to get their inheritance sooner. Plus, it offers more control over when and how your assets get distributed and keeps details private, a point often raised in online discussions. There’s also the irrevocable trust. With this trust you’ll need to name a trustee — someone other than yourself — to manage the trust account during your lifetime. It may be tempting to establish an irrevocable trust to avoid estate tax because the assets are removed from your estate for federal estate tax purposes and they won’t be included when calculating your federal estate tax burden. However, assets placed in an irrevocable trust during your lifetime may be considered a gift, subjecting the transfer to gift tax implications.

Exploring Types of Trusts

There are several different types of trusts. Each one has a unique role. So, to choose wisely between Wills vs Trusts, you need to understand these varieties.

Charitable Trusts:

There are two kinds of charitable trusts. The “charitable remainder trust” and the “charitable lead trust”. Charitable remainder trusts allow non-charitable beneficiaries like family members to receive some funds, then the remainder of those funds is given to a charity upon a set time — no longer than twenty years. Charitable lead trusts provide financial support to a designated charity for a specific timeframe and when that time expires, the rest of the funds go to non-charitable beneficiaries.

These can provide some economic benefits — even a partial tax deduction.

Although remember that charitable trusts typically need to be set up as an irrevocable trust because a tax deduction on donated assets is typically only applicable when using an irrevocable trust.

Special Needs Trusts:

Here’s one that might surprise you. Special needs trusts give family members or guardians a way to leave an inheritance to loved ones with disabilities without impacting their eligibility for public benefits.

Benefits like supplemental security income and other programs could be affected if inheritance isn’t protected in the right way. This type of trust makes sure a loved one’s needs are covered without putting essential benefits at risk.

Testamentary Trusts:

A testamentary trust is a type of trust created using a deceased person’s last will and testament, becoming effective only when they pass away. This trust outlines the terms and instructions regarding how their designated trustee should manage and distribute the deceased person’s assets. The “testator”, the person creating the will, has the ability to specify their desired conditions regarding the distribution of their property and appoint their successor trustee to manage it according to the deceased’s instructions. It’s about providing that ongoing financial care, especially when minors are involved, as is common with trusts in the first place.

Head-to-Head: Wills vs Trusts

Here’s a comparison that you’ll find helpful as you weigh your options.

It lays out some major differences:

WILLS and TRUSTS

  • Time of Effect Takes effect when the person passes away. Takes effect upon signing and funding the account.
  • Probate Process Must go through probate. Assets in a trust don’t require probate.
  • Privacy Will becomes public record. Terms of the trust remain private.
  • Control over Asset Division Limits the control of beneficiaries regarding asset distribution. You have more control over the timing of distributions to beneficiaries.
  • Flexibility Limited flexibility to modify or amend. Revocable trusts can be modified or revoked at any time.

Who Benefits from What?

The choice between Wills vs Trusts really boils down to this. What makes sense for you based on what you need and what your estate entails? Let’s walk through it. A will is likely enough for small estates — meaning few assets — and when probate costs wouldn’t significantly diminish the inheritance. They are simple and straightforward, providing a good starting point for many individuals to name guardians for minor children, assign their executor, and avoid dying intestate. However, it may be important to choose a trust when there are complicated financial situations and when it comes to privacy concerns.

A revocable living trust can manage multiple properties in different states, allowing designated beneficiaries to access funds in the accounts while still receiving legal protection from creditors. If you’re concerned about avoiding those potentially expensive probate costs and ensuring privacy for yourself, as well as your family, this type of trust might be more beneficial for managing your estate than a simple will.

FAQs about Wills vs Trusts

Why a will is better than a trust?

Although both a will and a living trust provide for asset distribution, for some, a will might be a better estate plan than a trust. This is especially true when estates are smaller and straightforward in terms of assets. Establishing a trust will generally cost more than creating a will. Plus, using a living trust might limit you if you choose a trustee to manage the account during your lifetime and decide you’re responsible enough to manage the funds yourself. Depending on the kind of living trust you set up, a trustee also needs to take on fiduciary responsibilities. So, it’s a lot more involvement for anyone agreeing to step into that role.

What are the negatives to a trust vs will?

The most commonly identified negative aspect of a trust vs a will is cost. Not only will it be more expensive for you to initially set up and fund a living trust account but if you’re setting up an irrevocable living trust you need to think about long-term costs. It may cost money over the lifetime of the trust. The initial legal costs can range between $1,500–$3,000 depending on the law firm. Then the cost to maintain an irrevocable trust for years after it’s established could range from $2,500–$7,000 or higher over time. It’s important to consider also, once established an irrevocable trust cannot be altered, whereas you can alter or amend your will as your life circumstances change.

What are reasons to not have a trust?

Let’s be real. A trust can provide useful tools when managing complex estates, offering privacy and protecting wealth, especially in cases with a family business or complicated family structure. But there are legitimate reasons you might opt out of creating a trust. Maybe your finances are pretty basic — no family business or vast real estate holdings to transfer property. If that’s the case a trust might feel unnecessarily complicated and more expensive than necessary for managing a simple estate. You could save yourself that extra hassle.

What are the disadvantages of a trust account?

One often-cited disadvantage is this: managing assets inside a trust account involves upkeep and reporting. You’ll either need to stay on top of this or rely on your designated successor trustee to properly keep track of things, especially when it comes to income reporting for investments like funds, ETFs and more, but it depends on the trust’s terms and how its set up.

Conclusion

No one-size-fits-all answer exists for choosing between wills vs trusts. This all boils down to your needs and priorities. Wills are relatively affordable. They allow you to avoid intestate succession and lay the foundation for how assets will get distributed. Trusts are better suited for larger, more complicated estates or financial situations. It will help avoid the potentially expensive probate process, ensure your family has more flexibility when you pass away and offers more privacy regarding the nature of your estate and any instructions.

This journey towards estate planning often includes finding the right advisors, like lawyers and financial professionals. You can seek their expert opinion about which of these choices — Wills vs Trusts — best suits your family and the future of your financial security.

Kevin

Kevin

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