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Will vs Trust: Is One Better Than the Other?

When it comes to planning your estate, you might be wondering whether you should use a will or a trust (or both).

Understanding the similarities and the differences between these two important documents may help you decide which strategy is better for you.

What is a will?

A will 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 an estate executor as the legal representative who will carry out your wishes.

In many states, your will is the only legal way you can name a guardian for your minor children. Without a will, your property will be distributed according to the intestacy laws of your state.

Keep in mind that wills and trusts are legal documents generally governed by state law, which may differ from one state to the next.

What is a trust?

A trust document establishes a legal relationship in which you, the grantor or trustor, set up the trust, which holds property managed by a trustee for the benefit of another, the beneficiary.

A revocable living trust is the type of trust most often used as part of a basic estate plan. “Revocable” means that you can make changes to the trust or even end (revoke) it at any time.

For example, you may want to remove certain property from the trust or change the beneficiaries. Or you may decide not to use the trust anymore because it no longer meets your needs.

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 a few important ones.

  • A will generally requires probate, which is a public process that may be time-consuming and expensive. A trust may avoid the probate process.
  • In order to exclude assets from probate, you must transfer them to your revocable trust while you’re living, which may be a costly, complicated, and tedious process.
  • Unlike a will, a trust may be used to manage your financial affairs if you become incapacitated.
  • 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.
  • A trust can be used to manage and administer assets you leave to minor children or dependents after your death.
  • In a will, you can name a guardian for minor children or dependents, which you cannot do with a trust.

Which is appropriate for you?

The decision isn’t necessarily an “either/or” situation. Even if you decide to use a living trust, you should also create a will to name an executor, name guardians for minor children, and provide for the distribution of any property that doesn’t end up in your trust.

There are costs and expenses associated with the creation and ongoing maintenance of these legal instruments.

Whether you incorporate a trust as part of your estate plan depends on a number of factors. Does your state offer an informal probate, which may be an expedited, less expensive process available for smaller estates?

Generally, if you want your estate to pass privately, with little delay or oversight from a probate court, including a revocable living trust as part of your estate plan may be the answer.

 

Important Disclosure
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Beneficiary Arrangements

As you prepare your financial strategies, it’s important to spend some time considering beneficiary arrangements. Whether it’s through an IRA, life insurance, wills or trusts, anytime you want to leave money to others, you want make sure that you have in your mind a good understanding of how you want to designate the beneficiary.

For example, let’s say you’re a husband and a father and you have money in a retirement account — an IRA. Typically, your primary beneficiary will be your wife. What does that mean? It means that if you die and your wife is still alive, your wife will receive all the proceeds of that account. The wife in this scenario is considered a primary beneficiary. But what if your wife dies before you?

Or what if you and your wife die at the same time? In this scenario you may want what are called secondary or contingent beneficiaries. Let’s say you and your wife have three children: child one, two and three. These children can be named as a second line of beneficiaries, or contingent beneficiaries, so just in case your wife dies before you do, or you and your wife die at the same time, you’ve got the second line of beneficiaries, the three children. You may choose to divide the proceeds of your retirement account evenly between the three children — a third/a third/and a third.

But here’s something else to consider. What if your children have children of their own, your grandchildren? Let’s say child No. 1 has 3 children child No. 2 has no children at all and child No. 3 has two children — meaning you have a total of five grandchildren. Now, you may want to start asking some additional questions about designating beneficiaries.

Let’s assume your wife dies before you. Now there is only you. Therefore, when you die, the proceeds are designated to go to your three children who you have named as contingent beneficiaries. Well, what if one of your children dies before you? Let’s say your third child, the one with two children, dies before you .Then what happens? Well, if you haven’t set up your beneficiaries appropriately, you could end up disinheriting those two grandchildren. All of the proceeds could end up going to child one and child two, cutting out your third child’s surviving children.

That’s generally not what people want. Instead, they may say, “We want this child’s share to go to his/her two children.” This is generally referred to as a per stripes distribution, meaning that each branch of the family is to receive an equal share. If that is your objective, you would want to incorporate that term into your beneficiary designations. Then, should both your wife and one of your contingent beneficiaries die before you, the beneficiary designation would direct that contingent beneficiary’s share of the proceeds to go to his/her heirs.

This content is provided for informational purposes only and should not be construed as advice designed to meet the particular needs of an individual’s situation. No statement contained herein shall constitute legal advice. Consult with your attorney about your personal situation.