Everyone has heard the terms will and trusts, but not everyone knows the differences between them. Both are useful estate planning tools that serve different purposes, and both can work together in the context of an overall more comprehensive estate plan.
One main difference between wills and trusts is that a will goes into effect only after you die, while a trust takes effect as soon as its created. A will is a document that directs who will receive your property at your death and it appoints a person known as a personal representative to carry out your wishes stated in the will.
By contrast, a trust can be used to begin distributing property before death, at death or even manage assets after death. A trust is a legal arrangement through which a person (or an institution, such as a bank), called a “trustee,” holds legal title to property for another person, called a “beneficiary.” A trust usually has two variations of beneficiaries – one set that receives income from the trust during their lives and another set that receives the remainder after the income beneficiaries pass.
A will can distribute property held by you in your individual name when you die. It does not cover property held in joint tenancy, held in a trust, or that has a designated beneficiary, provided the beneficiary is someone other than “the estate”. A trust, on the other hand, covers only property that has been transferred to the trust. In order for property to be included in a trust, it must be put in the name of the trust.
Another difference between wills and trusts is that a will passes through probate. Unlike a will, a trust bypasses probate and therefore avoids both the costs and delays associated with the probate process. It also remains private, as opposed to a will, which is a matter of public record.
A major difference between wills and trusts is typically cost. Even though more expensive initially, a trust can ultimately be less expensive because it avoids the probate process, provided it’s properly drafted and funded.
Wills and trusts each have their advantages and disadvantages. For example, a will allows you to name a guardian for children and to specify funeral arrangements, while a trust does not. On the other hand, a trust can be used to plan for disability or to provide savings on taxes for larger estates. Ultimately, it’s up to you and your attorney to decide which of these two methods is best for you based on your individual circumstances. However, each of these factors should be carefully considered as part of your overall decision.