Estate planning is a crucial part of mapping out your family's future. While there are many different components of an estate plan, wills and trusts are an important part of assuring how your assets will be distributed after your death—and to whom. "When someone dies without a will, their assets belong to their estate until the probate process is complete," says Carolyn Yun, CPA and CFP at Hollow Brook Wealth Management LLC in New York. "To ensure that a person's final wishes are met, it's important to get a will drafted," she says.
A will basically directs what will happen to your property after you die. "Most wills will appoint an executor, which is the person that handles the administrative duties of settling your estate," says Emily Cisek, co-founder and CEO of The Postage, a full-service digital estate planning platform. "A trust, on the other hand, is a legal entity that is set up to hold assets for someone's benefit," says Cisek.
It's a good idea to have both. "People should definitely have both documents—in addition to a power of attorney and advanced healthcare directives," says Jala Eaton, a licensed attorney in California and a certified trust and financial advisor. But there are points where the two differ, that are important to be aware of. Here are the main differences between trusts and wills—so you can be better informed while making your plan for the future.
Everyone should have a will—it's a basic estate planning document that is effective after your death.
No matter what, you should have a will. Again, a will is where you can name your beneficiaries (who gets your assets) and one of the documents where you can appoint legal guardians for any minor children you have. While there are different types of wills, a simple will is a list of your assets and possessions and what you want to happen to them. "These are the easiest types of wills to create," says Cisek. Other types of wills include: a testamentary will, where the beneficiaries receive assets after they meet a certain condition, like age or marriage; a joint will for married couples; and living wills, which dictate what you want to happen in your last days, such as with medical care.
While wills are effective after someone's life, a trust can be used during their lifetime. A living or revocable trust allows the trustor to make changes to it, as they are usually the trustee as well. "A revocable trust provides maximum control over assets," says Cisek. "However, those funds must be reported as income," she adds. The income in an irrevocable trust, on the other hand, can't be taxed—but you also cannot make any changes to it once it's set.
"Everyone should have a will, even if a trust is used," says Blakely Moore, a Florida-based estate planning attorney.
A will is a public document that has to go through probate; a trust is a private entity.
A will has to go through probate court, where a judge either grants permission for the assets to be passed down according to the will, or decides what happens to them and appoints an executor if the person died without a will. Having a will (and a well-written one that has been looked over by a lawyer) provides the probate court with instructions on what you want. "It's important to understand wills do not skip probate, but they do allow you to say what the probate court is going to do," says Philip J. Ruce, an estate planning attorney in Minnesota.
Once filed with the court to start the probate process, wills are public documents. "Some people do not want the public knowing who gets their money when they die or what the money will pay for if it stays in a fund for young children, etc," says Ruce. He suggests a living trust as a better option in this case. A living trust generally avoids probate altogether, and becomes an irrevocable trust after the trustor's death, offering more protection and privacy.
Still, it is wise to have both. "A will and trust go hand in hand," says David Bross, senior estate planner at Truepoint Wealth Counsel in Ohio. "While a trust will control the distribution of the assets, the will ensures all assets pass to the trust, and allows you to nominate an executor and guardian," he explains.
Having a trust is a quicker way to transfer your assets.
A trust ensures that your assets get transferred to your beneficiaries faster, since they likely do not have to go through probate, which can be a lengthy and public process—anywhere from nine months to a year, according to Bross.
A trust is an important and beneficial part of your estate plan, especially for those who want better control over their wealth as they pass it down to future generations. The misconception that trusts are only for the rich keeps them from being more commonly used, says Eaton. "More people are beginning to use them to avoid probate. If you own a home, have children, and want to control your wealth and legacy for generations, then creating a trust will benefit you in the long term," she explains.
Start your estate plan early (in your 20s and 30s) and update it after major life events such as starting a business, getting married, or having children. Creating a will and setting up a living trust is critical in protecting your wealth and making sure it goes to the people and organizations of your choice.