Most people know that the most elemental part of estate planning is creating a will. However, in many situations, creating a trust will preserve more of your wealth for your surviving family members while also simplifying the distribution of your assets.
One of the most important steps in estate planning is deciding whether you need a will, a trust, or both. But what is the difference between a will and a trust?
At Hunter Sargent, we have extensive experience helping our clients determine which estate planning tools are best for them. Whether you’re ready to create a will, are considering creating a trust, or aren’t sure what you need, our estate planning attorneys are here for you!
What Is a Trust?
Before deciding on a trust vs. will, you first need to understand the difference between will and trust entities. A trust document allows you to transfer assets to your loved ones (and sometimes to charitable causes).
When you place certain assets in the trust, you allow a third party (called a “trustee”) to take control of those assets and handle distributing them to your beneficiaries after death.
Depending on the terms of the trust you choose, you might be able to shield your beneficiaries from estate taxes, lessening the tax burden they’ll experience after your death. There are many different types of trusts, but here are some of the main ones used in estate planning:
Living Trusts
A living trust lets the grantor (the person who creates the trust) use and benefit from the assets within the trust during your lifetime. After your death, the assets can be transferred to your beneficiaries. There are revocable living trusts and irrevocable living trusts, and you can choose which one best suits your needs and goals.
Revocable Trusts
Revocable trusts are trusts that you can change or dissolve. Because they’re so flexible, they don’t usually have the tax advantages of an irrevocable trust. However, they can still make it easier to ensure your assets are passed down according to your wishes.
Irrevocable Trusts
Irrevocable trusts cannot be changed once they’re created (although, in some cases, you may be able to change one with a court order). Because you can’t easily reclaim assets in an irrevocable trust, this option can help to drastically reduce the estate tax your heirs will owe.
Remainder Trusts
Remainder trusts work almost like a hybrid of a revocable and irrevocable trust. With this kind of trust, you can arrange for the trust to pay you a certain amount of money over a set period of time. Once that time is up, the remaining assets in the trust can be transferred to your heirs or to a charity.
Testamentary Trusts
If you leave a will but no trust, the executor of your estate might create a testamentary trust. This legal arrangement creates a trust that contains items you have listed in your last will. The executor of your estate will then name a trustee. The trustee is responsible for overseeing the trust and making sure the assets are distributed according to your wishes.
Life Insurance Trusts
Federal estate tax can considerably cut into the assets you want your loved ones to inherit. You might be able to reduce that tax burden with a life insurance trust. Through this trust, you can designate beneficiaries and appoint a trustee to distribute the death benefit to your heirs after your death.
What Is a Will?
A major difference between a will and a trust is that a will is generally much simpler. A will is a set of instructions for your loved ones after your death. These instructions typically have to do with the following:
- How your assets will be distributed after your death
- Whether you would like a portion of your assets to be used for a charitable donation after your death
- Who will serve as a guardian for your minor children if needed
- Who will serve as a guardian for your pet(s)
- Your funeral and burial arrangements
Many people think they don’t have enough assets to need a will. However, in most cases, a will takes significant stress off of your surviving spouse, surviving children, and other loved ones.
It can be extremely difficult to make decisions when you’re already grieving, so your loved ones will likely appreciate the specific instructions for asset distribution, funeral arrangements, etc.
Advantages of Using a Trust Over a Will
Deciding on a trust or will can be complicated. And as you can imagine, each option comes with its own advantages. Here’s a look at some of the advantages of a trust vs. will:
- Trusts usually let you avoid the probate process, which can be long, expensive, and public
- Trusts give you more control over how your assets are distributed
- Some types of trusts can help you avoid estate taxes and wealth transfer taxes
- If need be, you can create a trust to offer long-term support to a loved one with special needs
- If you wish, you can set up a trust that takes effect before the time of your death
Keep in mind that there are many types of trusts, and some may prove to be more advantageous than others. An estate planning attorney can help you understand the key differences between trust types and decide which one is best for your situation.
Advantages of Using a Will Over a Trust
Of course, in some cases, a will is the better option. Here are some of the advantages of a will vs. trust:
- A will is generally less costly to prepare
- It takes less time to prepare
- It allows you to name guardians for pets, children, and other dependents
- It allows you to specify what kind of funeral arrangements you would like
Some people may try to prepare a last will on their own. However, when you work with an estate planning attorney, your lawyer can help ensure your will is legally enforceable. For instance, for a will to be valid in Texas, it must be signed by two “disinterested witnesses,” or people who don’t benefit from your will in any way.
Will vs. Trust: Which One Do I Need?
Depending on your financial situation and other factors, you might determine that you need a will, trust, or both. Regardless of your assets, you should have a will if you have children under the age of 18. A will allows you to name a guardian for your children in the event that you or the other parent are unable to care for them.
If you have a relatively uncomplicated estate, you likely only need a will. For example, imagine you have a home, a vehicle, and the balance in a couple of bank accounts to pass down. In this case, a will is likely to suffice.
Now, imagine that you have several pieces of real estate, an extensive investment portfolio, multiple retirement accounts, and high-value items (like pieces of fine art and high-end jewelry). A large estate like this will likely incur significant estate taxes without careful planning. In this case, you will likely need a trust — although it’s not a bad idea to have a will as well.
Who needs a trust instead of a will? As a general rule of thumb, if you have what could be reasonably described as a “complex estate,” you probably need a trust to be part of your estate plan.
Need to Create a Will, a Trust, or Both?
Whether you know which tool you need or are still trying to decide between a trust vs. will, working with an attorney to craft your estate planning documents is essential. At Hunter Sargent, we’re committed to helping you achieve the peace of mind that comes with knowing you have a current, customized estate plan.
We can help you determine the estate planning tools that are right for you and then ensure they’re drafted according to all state laws. We have experience helping clients create simple wills, craft trusts to distribute complex estates, and everything in between!