When building an estate plan, there are two main documents that you generally need to consider: a will and a trust. As we have previously discussed,1 a will is important for establishing a firm legal precedent for how you want your various assets to be handled. For some, it is the ideal option for handling an estate transfer, but sometimes other solutions are necessary.
A trust offers a viable alternative to a traditional will, though which you should go with ultimately depends on your specific needs.
What Is a Trust?
A trust is a legal document that grants a third party (called a trustee) the right to hold and direct assets in a trust fund on the behalf of a beneficiary.2 Trusts can be arranged in many ways to specify how and when various assets are passed on to one’s beneficiaries. In finance, a trust can also be a type of closed-end fund built as a public limited company.3
Unlike a will, a trust typically does not go through a probate period, so that beneficiaries usually gain access to the included assets more quickly than they would with a will. Additionally, if it is considered an irrevocable trust (meaning that it cannot be revised after completion), then it may not be considered part of the taxable estate. This results in fewer taxes being due upon your death.4
There are many different types of trusts out there, but all of them fit within a few broad categories:5
- Living or Testamentary: A living trust is a written document where an individual’s assets are provided as a trust for the individual’s use and benefit during their lifetime. A testamentary trust specifies how the assets of an individual are designated after the individual’s death.
- Revocable or Irrevocable: A revocable trust can be changed or terminated by the trustor during their lifetime. An irrevocable trust cannot be changed once it is established.
- Funded or Unfunded: A funded trust has assets put into by the trustor during their lifetime. An unfunded trust consists only of the trust agreement with no funding.
All trusts can be defined by these key elements.
Trusts VS. Wills
Though they are both important estate planning tools, trusts and wills differ in several important ways. The first and most obvious difference between the two is the amount of time and paperwork involved. Due to the general lack of a probate period, beneficiaries don’t have to wait as much to receive the assets included in a trust compared to those featured in a will. It is also active on signing, so it takes effect almost immediately.
That said, a trust is more limited than a traditional will. A trust only contains any assets or property that you have transferred (in writing) to the trust. This can be a complex process, so few people ever transfer everything they own to a trust. Also, a will can do some important things that a trust cannot. For instance, if you have minor children and want to name a guardian for them, you must use a will, as trust does not have this option. You can also use a will to forgive any debts owed to you.6
Which One Is Right For Me?
The general rule of thumb for estate planning is that nearly everyone needs a will, but not everyone needs a trust.7 Yet both have major benefits that are worth considering. For instance, a trust can greatly streamline the process of transferring an estate after your death, as you can avoid the often lengthy and costly probate period that comes with managing a will. However, there are certain things that a trust cannot cover, so if you have minor children, creating a will is critical to ensure their protection and inheritance.8
That said, you don’t need to choose between one and the other. A trust and a will are two separate legal documents and can function alongside one another. In fact, many testamentary wills (also called a last will and testament) will have a trust written into the document to cover specific beneficiaries.9 Even if written separately, a will and a trust generally don’t override one another, although if any issues arise it will typically be the trust that wins out.10 But so long as you have a capable legal professional working with you to write them, having both a trust and a will is an excellent way to guarantee that your estate is carried out according to your wishes.
1. Skadberg, R. G. (2021, July 12). Preparing For The Future: What is a Will? – CCSK Law: Life & Business Planning. CCSK Law. https://ccsklaw.com/preparing-for-the-future-what-is-a-will/.
2. Royal, J. (2021, July 9). What Is A Trust And How Does It Work? Bankrate. https://www.bankrate.com/investing/what-is-a-trust/.
3. Kagan, J. (2020, October 19). Trust . Investopedia. https://www.investopedia.com/terms/t/trust.asp.
4. Fidelity. (n.d.). What Is A Trust? Fidelity. https://www.fidelity.com/life-events/estate-planning/trusts.
5. Hicks, P. (n.d.). What Is a Trust in Estate Planning? Trust & Will. https://trustandwill.com/learn/what-is-a-trust.
6. Mary, R. (2020, August 11). Have a Trust? You Still Need a Will. www.nolo.com. https://www.nolo.com/legal-encyclopedia/free-books/avoid-probate-book/chapter7-4.html.
7. Jarrell, M. (2021, May 19). Will vs. Trust: What’s the Difference? Investopedia. https://www.investopedia.com/articles/personal-finance/051315/will-vs-trust-difference-between-two.asp.
8. Jarrell, M.
9. Kagan, J. (2021, June 9). Testamentary Will. Investopedia. https://www.investopedia.com/terms/t/testamentary-will.asp.
10. Mary, R.