Trusts and wills can both be helpful tools in planning for your estate; however, understanding the differences between these options can make a big difference in efficiently distributing assets to your loved ones. We’ll discuss the functions and benefits of each legal arrangement, then identify situations where you may need both a will and trust.
What is a will?
A will is a legal document that provides instructions on how to distribute your assets (money, real estate, and personal items) after you die. A will includes several fiduciary roles. These roles have clear responsibilities:
- Executor – Responsible for administering and settling the estate per the terms of the will
- Trustee – Responsible for administering any property placed in trust which will ultimately benefit the named beneficiaries
- Guardian – Person(s) who would care for your children while they are minors or unable to care for themselves
What is a trust?
There are four main types of trusts:
- Testamentary Trust: A testamentary trust is set up in accordance with your will. It technically does not exist until after you die and the trust is created once your will has gone through probate. A testamentary trust is flexible because you’re able to change your will at any time up until death. A situation where you may want to use a testamentary trust would be if you will your assets to your dependents but don’t want them to have access to the money until they reach a certain age.
- Living Trust: A living trust, also known as an inter vivos trust, is set up while you’re still alive to help with the seamless transfer of assets to your beneficiaries after your death. A living trust avoids probate (unlike a will) and can be altered up until death. You’re still able to access assets within the trust during your lifetime.
- Revocable Trust: A revocable trust is created while you’re still alive. This type of trust is flexible because you can alter the terms and beneficiaries up until death. Many people utilize revocable trusts to avoid going through the probate process.
- Irrevocable Trust: An irrevocable trust cannot be altered after the trust is created, only under extremely rare circumstances. The primary purpose of irrevocable trusts is to help shift assets out of one’s taxable estate. Assets belonging to the trust are no longer subject to income taxes for the benefactor (the person setting up the trust) while they are alive. After the benefactor’s death, assets belonging to the trust are not subject to estate taxes.
What is the difference between a will and a trust?
The largest difference between wills and trusts is that wills are strictly concerned with what happens to your assets after you die. Trusts (with the exception of testamentary trusts) are created and active while you’re alive. Your assets are held within the trust and the trust provides instructions on how to distribute those assets after your death. Wills typically go through probate, while anything placed in a trust does not.
Do I need a will and a trust?
A will may benefit you if you want to:
- Name a guardian for dependents who are still minors (or a pet!)
- Specify who/where your assets should pass
- Specify final arrangements
A trust may benefit you if you want to:
- Avoid probate
- Have the ability to control how and when your assets are transferred
- Avoid estate taxes with an irrevocable trust
Both of these options may apply to you and in that case, it may be best to have both a will and a trust. Depending on your assets, estate planning can be tricky and DIY may not be an option you’re comfortable with. At Marshall, we consider your whole financial picture when helping to plan for your future. We also coordinate with your attorney to help ensure your estate plan goes smoothly. Feel free to contact a Marshall wealth advisor today to begin your journey.
