Trust vs. will: What’s the difference?

You’ve heard the terms will and trust, and you know they’re important. But what do these documents do?

What happens to your assets after you die depends a great deal on how you prepared during your life. If you do nothing, state law will determine what happens to your assets. However, certain estate planning documents, such as a will or a trust, allow you to plan ahead for what happens to your assets.

 

What does a will do?

Wills are the most common tool for distributing assets after someone’s death. A will specifies:

• Your beneficiaries for assets like savings, investments and property
• Terms under which each beneficiary is to receive them

When you have a will, an executor, personal representative, or administrator files it with the court upon your death and has it proved valid. Your property and assets are then inventoried and appraised. Any debts are paid, and the remaining assets are distributed to designated beneficiaries. This entire court supervised process is known as probate.

In the absence of a will, the disbursement of assets that are titled in your name individually is handled according to the laws of the state in which you reside. (In other words, you forfeit control of the distribution of your assets after you die.)

Assets held jointly by you and someone else pass to the joint owner when you die. However, if the surviving owner does not have a will, these assets can once again be handled by the state upon their death. This means it’s important that both you and your loved ones have wills that are updated periodically.

Despite the importance of having a will, most people do not have one in place. According to a recent survey, only four in 10 American adults do.¹ But even for those who do have a will, it might not be enough to ensure that their assets are distributed according to their desires and values.

 

What does a trust do?

Because your will must be validated in court, it can turn your wishes into a matter of public record. To avoid probate, you might also consider setting up a trust. This can ensure that your assets are distributed to beneficiaries more quickly, as well as keep your personal financial information out of the public record.

A trust is a legal contract between at least two parties: you and one or more trustees. A trust makes sure your assets are managed the way you wish during your lifetime, in case you become disabled, and after your death.

When you establish a trust, you specify who you’d like to act as trustee, and exactly how and when you’d like your assets to be managed and/or distributed to your beneficiary or beneficiaries. Trustees can be individuals or financial institutions, such as a bank, or a combination of the two.

Trusts are generally either revocable and irrevocable. A revocable trust allows you to access your assets and adjust the terms of the trust, including any successor trustees or beneficiaries, at any time while you are alive and not incapacitated. An irrevocable trust, once set up and funded, usually can’t be changed.

 

How to get started

Typically, if people choose to include a trust in their estate plan, a will is also drafted. The will ensures that any assets not titled in the name of the trust upon your death will “pour over” into the trust and be distributed according to its terms.

 

If you’re writing a will:

• Consult with a financial professional and a qualified attorney. Keep in mind that every state has different laws governing wills and what makes them valid.
• Choose an executor. This person will be in charge of carrying out your wishes.
• Select guardians for your children, if applicable. You may be able to name several potential guardians, in order of preference, to cover your bases.
• Be specific and realistic about your assets and how you want them divided.
• You need a witness to sign your will, and a safe place to keep the original copy.

 

If you’re considering a trust:

• Consult with a financial professional and a qualified attorney who can help you understand the different types of trusts and what might work best for your needs.
• Be sure to work with your advisors to assure that your plan is implemented properly. Without proper implementation, your plan may not be effective in achieving your goals.
• Catalogue your important information, beginning with your assets. Include real estate, retirement plans, annuities and life insurance, as well as liquid assets.
• Identify a trustee(s) who will have a fiduciary responsibility to manage your assets and distribute them to your designated beneficiaries.
• Identify each beneficiary by name and relationship — including any charities or organizations you would like to leave assets to.

 

Don’t forget to communicate with your partner, children and other loved ones when you’re making financial decisions that affect the whole family.

 

Make estate planning a habit

Neither a will nor a trust is a one-time document. It’s important to check in and update these documents on a regular basis to ensure they reflect your current assets and wishes.

Certain milestones should motivate you to talk with a financial professional about reviewing the details of your will or trust. For example, if you get married or divorced, have a child, or gain a significant new asset, make sure your new situation is appropriately reflected in your will and/or trust.

 

Read more about trust and estate planning.

 

 

¹ 2020 Estate Planning and Wills Study. Caring.com.