Part of wealth planning is ensuring your loved ones are taken care of once you are gone. Though it can be an uncomfortable topic, it is an important one. I know from personal experience that having your wishes clearly stated vs. not can make all the difference to your heirs.
Often, my clients will ask about trusts vs. wills — such as what is the difference and which is better for stating and carrying out those wishes. Like many things in financial planning, it all depends on your situation, and also many people have both. But let’s look at wills, trusts, how they are used, and the pros and cons of each so you can go into a decision well-informed on your options.
What is a will?
A will is a written, legal document that defines how you want your assets, including money, real estate and personal property like cars, jewelry, and other heirlooms, distributed to your heirs and beneficiaries after you die.
A will can also name guardians of your minor children and pets, if you have them, as well as an executor who is responsible for ensuring your wishes are met. Given a will goes into effect after you die, you can change it at any time.
Wills are subject to probate, which is a court proceeding that takes place after someone dies to ensure the property and possessions are distributed to the correct people. It also ensures any taxes and debt are paid in full, and if they are not, those will be paid first.
People tend to want to avoid probate because it can be an arduous process that in some cases can take months or even years. It can also be quite expensive if your estate is complicated or extensive, costing your beneficiaries tens of thousands of dollars. And, because it happens in the federal court system, the information is part of the public record.
What is a trust?
A trust is a legal arrangement that allows a third party to hold and direct your assets in a trust fund on behalf of the beneficiaries until a predetermined time. If you’re using a trust as an alternative to a will, that time will usually be upon your death. It then dictates how the assets are to be distributed to heirs and beneficiaries.
While there are quite a few types of trusts, they all contain the same designations. The owner of a trust is the grantor, and that person always names a trustee to manage the trust. A grantor can name themselves as the trustee, but if they do, they also need to name a successor trustee in the event they die or can no longer make decisions.
There are three main types of trusts: revocable, irrevocable and charitable. All three can act as a will replacement. This may help you avoid probate to make it easier, and potentially less expensive, for your heirs and beneficiaries to access to the assets you leave them.
Types of trusts
A living trust is also known as a revocable trust because the grantor can alter, amend or terminate it any time while they are still alive. Like a will, a grantor can put bank accounts, real estate, and personal property into a trust, but heirs and beneficiaries can’t access any of it until the grantor’s death. When that happens, the successor trustee will ensure the estate’s outstanding debts and taxes are paid and that the assets are distributed to heirs and beneficiaries according to the grantor’s wishes without delay.
An irrevocable trust is like a revocable trust except for one major difference: it cannot be amended once it goes into effect. These are typically used as a tool to manage gifts and reduce or avoid estate taxes any beneficiaries may have to pay.
A charitable trust is used when the grantor wants to give away part of their estate to a favorite charity. The grantor determines which assets go toward charity, and which will go to heirs and beneficiaries.
Regardless of the type of trust you create, unlike wills, trusts go into effect once they are created. In addition, you cannot name guardians of your minor children in a trust, so if you have children younger than 18, you will also need a will to ensure they are taken care of.
When to use a trust vs. will
As mentioned, there is no one-size-fits-all approach to estate planning and the question of whether to prepare a will or a trust depends on your situation.
While wills are much more straightforward and less expensive to create, probate can end up costing your beneficiaries significant time and money. And because the probate process is public, you lose any privacy regarding your estate. Still, if you have a simple estate, a will might be the way to go, and you definitely need one if you have minor children.
Trusts, on the other hand, require more upfront work and can be more costly than a will to establish because you need the assistance of an estate planning attorney. And though you can make changes to your living or revocable trust, that will also cost you some attorney fees.
That said, the assets transfer into the trust fund immediately and do not require probate, so your heirs and beneficiaries won’t have to wait for their inheritance. Trusts are also private, which is important to many families.
One common arrangement is to have both a will and trust where the trust has some assets to start with and then the will adds more assets to it upon the holder’s death and the trust provisions come into play.
Given the complexities of estate planning, which often involve a deep understanding of federal and state tax and estate law, we recommend working with an attorney who specializes in estate planning. Not only can they help you decide on a will, a trust, or both, they can ensure that you are being proactive with your estate planning so you can feel confident that your heirs are taken care of in the way you wish.
Mallory is a Wealth Manager and Shareholder. She listens deeply and helps simplify complex financial situations to help clients move into an easier, clearer future. She aims to give financial advice that is compassionate, wise, and easy to understand.