Will vs. Trust: Know the Difference
Wills and trusts are common documents used in estate
planning. While each can help in the distribution of assets at death, there are
important differences between the two.
What Is a Will? A last will and testament is a legal
document that lets you direct how your property will be dispersed (among other
things) when you die. It becomes effective only after your death. It also
allows you to name a personal representative (executor) as the legal
representative who will carry out your wishes.
What Is a Trust? A trust is a legal relationship in
which you, the grantor or trustor, set up a trust, which holds property managed
by a trustee for the benefit of another, the beneficiary. A revocable living
trust is the type of trust used most often as part of a basic estate plan.
"Revocable" means you can make changes to the trust or even revoke it at any
time.
A living trust is created while you're living and takes
effect immediately. You may transfer title or ownership of assets, such as a
house, boat, automobile, jewelry, or investments, to the trust. You can add
assets to the trust and remove assets thereafter.
How Do They Compare? While both a will and a
revocable living trust enable you to direct the distribution of your assets and
property to your beneficiaries at your death, there are several differences
between these documents. Here are some important ones.
1. A will generally requires probate, which is a
public process that may be time-consuming and expensive. A trust may avoid the
probate process.
2. A will can only control the disposition of assets
that you own at your death, including property you held as tenancy in common.
Different Documents, Different
FeaturesEven if you have a revocable living trust,
you should have a will to control assets not captured in the
trust.*Depends
on applicable state laws.
It cannot govern the distribution of assets that pass
directly to a beneficiary by contract (such as life insurance, annuities, and
employer retirement plans) or by law (such as property held in joint tenancy).
3. Your revocable trust can only control the
distribution of assets held by the trust. This means you must transfer assets
to your revocable trust while you're living, which may be a costly,
complicated, and tedious process.
4. Unlike a will, a trust may be used to manage your
financial affairs if you become incapacitated.
5. If you own real estate or hold property in more
than one state, your will would have to be filed for probate in each state
where you own property or assets. Generally, this is not necessary with a
revocable living trust.
6. A trust can be used to manage and administer
assets you leave to minor children or dependents after your death.
7. In a will, you can name a guardian for minor
children or dependents, which you cannot do with a trust.
Generally, most estate plans that use a revocable trust also
include a will to handle the distribution of assets not included in the trust
and to name a guardian for minor children. In any case, there are costs and
expenses associated with the creation and ongoing maintenance of these
documents. Keep in mind that wills and trusts are legal documents generally
governed by state law, which may differ from one state to the next. You should
consider the counsel of an experienced estate planning professional and your
legal and tax advisers before implementing a trust strategy.
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