Estate planning helps protect your assets and ensure your wishes are carried out after you pass away. One of the first steps you'll make in estate planning is determining what documents to prepare, which typically include a trust and/or will. It's common to find them confusing. But even though they have some similarities, they're not interchangeable. Nor are they mutually exclusive.
By the end of this article you'll understand the main similarities and differences of wills vs trusts. And you will be better equipped to decide which documents you want in your estate plan to best suit your unique circumstances.
What Is A Will?
For starters, both wills and trusts are essential tools for estate planning. When prepared correctly, they can work together to create a comprehensive plan for your financial legacy.
What is a will? A will, aka a last will and testament, is a document that explicitly outlines a person's preferences for how their assets are distributed after death. It can also designate guardians for one's children and desired end-of-life arrangements.
A simple way to think about a will is like a personal letter to the future. It's a legal document that outlines how you want your assets to be dispersed after you pass away. It allows you to designate beneficiaries and guardians for your children, and even specify who should oversee the process, known as the executor.
Be careful not to confuse a regular will with a living will. A living will is also known as an advance healthcare directive, which is a legal document that outlines an individual's preferences and instructions for medical treatment and care in case of illness or incapacitation. It acts as a guideline on how to handle their healthcare needs if they can no longer able to communicate.
What Is A Trust?
What is a trust? A trust is a legal fiduciary relationship that allows a third party to manage a person or entity's assets for the benefit of specified beneficiaries. The terms are set by the creator of the trust. Trusts can help save time, maintain privacy, avoid probate and court fees, reduce estate taxes, and even provide for the long-term care of loved ones. Think of trusts like well-crafted plans that can offer more control and flexibility.
A trust enables you to transfer your assets to a trustee who then manages them according to your instructions for the benefit of your chosen beneficiaries. There are many different types of trusts including revocable trusts, irrevocable trusts, grantor retained annuity trusts, special needs trusts, etc.
Those who elect to have a trust in their estate plan, typically prepare a will simultaneously. Remember, wills and trusts are not mutually exclusive. The main reason why you should also prepare a will if you create a trust is so that any assets that are not titled in the name of your trust when you die can “pour over” into your trust. And thus be handled according to your trust's terms.
People's lives and assets can get very complex over time. And having both a trust and a will can provide maximum asset protection.
Related reading: How Much Does Probate Court Cost And How Does It Work?
Differences Between A Will vs Trust
Wills and trusts are both important estate planning tools, but they serve different purposes and have distinct differences. Here's a look at how a will vs trust differs in terms of function, probate, privacy, and control.
- A will is a legal document that specifies how your assets and property should be distributed after your death.
- A trust is a legal entity that holds and manages assets on behalf of beneficiaries.
- Assets distributed through a will typically go through a legal process called probate, where the court oversees the distribution of assets. Probate can be time-consuming, costly, and public.
- Assets held in a trust usually bypass probate, leading to a quicker and more private distribution of assets. This can save time and money for your beneficiaries.
- Wills are public documents, and the details of your assets, beneficiaries, and wishes become part of the public record during probate.
- Trusts are private documents, and their details remain confidential. This privacy can be valuable for those who prefer to keep their financial affairs confidential.
- A will only becomes effective after your death and it allows you to express your wishes for the distribution of assets at that time. You have full control over your assets while you're alive.
- Trusts can be set up to become effective during your lifetime (living trust) or after your death (testamentary trust). Living trusts allow you to manage and control your assets during your lifetime, and you can outline specific conditions for distribution.
Benefits Of Trusts And Wills
Advantages of writing a will
- Wills are relatively straightforward to create, making them accessible for many people without the need for complex legal structures.
- There are many free online templates available for creating your own last will and testament.
- Wills are typically more cost-effective to establish than trusts.
- Well suited for individuals with simple estate planning needs.
- Allow you to clearly express your final wishes, including who should inherit your assets, who should be the guardian of your minor children, and how your property should be distributed.
- Wills are flexible and can be updated or revised relatively easily as your circumstances change.
Advantages of trusts
- Assets held in a trust typically bypass the probate process, which can save time and money and provide a more efficient distribution of assets to beneficiaries.
- Trusts offer privacy since they are not part of the public record. This can help keep the details of your assets and beneficiaries confidential.
- Trusts provide for ongoing asset management, which can be particularly beneficial for individuals with complex financial portfolios.
- Additionally, trusts can provide professional asset management even after your passing.
- Trusts can also be used to provide for individuals with special needs without jeopardizing their eligibility for government benefits.
- There can be many tax advantages of creating a trust as well, such as reducing the amount of estate taxes that are triggered when you pass away.
Costs Of DIY Wills And Trusts vs Hiring A Pro
Creating a basic will using DIY templates or software can be quite affordable. It can range between $0 to $100 or more, depending on the platform and features.
DIY trusts, however, especially revocable living trusts, often cost more. Prices can range between $100 to $300 or more, depending on the software or template.
Pros of DIY:
- Cost-effective for simpler estate planning needs.
- Allows you to have some level of control over the process.
- Can be completed relatively quickly.
Cons of DIY:
- Limited guidance and legal advice, which can lead to mistakes or oversights.
- May not adequately address complex estate planning issues.
- Might not keep up with changes in laws and regulations.
The cost of hiring an attorney to create a will or trust can vary widely depending on your location, the attorney's experience, and the complexity of your estate. On average, you can expect to pay anywhere from a few hundred to a few thousand dollars or more for legal services related to wills and trusts.
Pros of hiring a professional:
- Expertise and personalized advice to create a tailored estate plan.
- Ensures that your documents error free, following all legal requirements.
- Can address complex situations and maximize tax efficiency.
- May provide ongoing support and updates as needed.
Cons of hiring a professional:
- Higher upfront cost compared to DIY options.
- May require scheduling multiple appointments and potentially a longer timeframe to complete the process.
- Costs can vary significantly depending on the attorney's fees and your circumstances.
When deciding whether to go the DIY route or hire a professional, consider the complexity of your financial situation. The more complex it is, the more worthwhile it typically is to hire a professional. You should also take your comfort with legal documents and estate planning concepts into consideration. Think of professional guidance like an investment itself as your assets and financial complexity grow.
Common Errors: Wills vs Trusts
It's important to be aware of common mistakes and errors that can occur when preparing wills and trusts. You want to avoid unnecessary complications, legal challenges, or unintended consequences.
Mistakes to avoid with wills:
Failing to update your will regularly to reflect changes in your life can lead to outdated and ineffective provisions. Examples of life events when you should update your will include marriage, divorce, births, deaths, or changes in financial circumstances.
Using unclear or ambiguous language in your will can create confusion and disputes among beneficiaries and heirs. Be specific and precise in your instructions.
Most jurisdictions require wills to be signed in the presence of witnesses. Failing to follow the legal requirements for execution in your state can result in the will being deemed invalid.
Mistakes to avoid with trusts:
Not transferring assets into the trust or failing to update the trust to include newly acquired assets can undermine its purpose. The trust needs to hold the assets you intend to protect or distribute.
Similarly, forgetting to create a “pour-over” will to account for any assets not captured by the trust when you die can result in probate, costly fees, and potentially lost assets.
Failing to provide clear and specific instructions for how the trust assets should be managed, invested, or distributed can create confusion among trustees and beneficiaries.
Choosing the wrong type of trust for your goals and circumstances can lead to unnecessary complexity and expenses. Different trusts serve different purposes, such as revocable living trusts, irrevocable trusts, or special needs trusts.
Regularly reviewing and updating your estate planning documents is also crucial to ensure they accurately reflect your wishes and circumstances over time.
How To Start Checklist
Estate planning may seem overwhelming at first, but it doesn't have to be. The more you familiarize yourself with estate planning terminology, the fundamentals, and available options, the easier it gets.
Think about what you want your estate plant to accomplish as well such as asset distribution, dependent care, tax minimization, charitable giving, etc. Once you complete your objectives, you can rest easier knowing your loved ones will be taken care of.
And if DIY isn't for you, remember there are thousands of qualified professionals who can answer any questions you have and prepare all the necessary paperwork on your behalf.
Here's a high level overview of how to start estate planning.
- Determine your primary objectives
- Create an Inventory of Assets
- Identify Beneficiaries and Heirs
- Choose Trusted Representatives
- Evaluate Your Debts and Liabilities
- Review Your Retirement Accounts
- Tax Planning
- Plan for Incapacity
- Review Insurance Coverage
- Create a Trust and/or a Will
- Regularly Update Your Plan
- Consult with Professionals or DIY
- Review and Understand Legal Requirements
Wills and Trusts are powerful tools that allow you to plan for your financial future and the well-being of your loved ones.
Wills provide a clear roadmap for distributing assets and expressing your final wishes. Trusts offer added benefits like avoiding probate and providing ongoing asset management.
The choice between a will vs trust depends on your unique circumstances and goals. And, many people find that a combination of both provides a comprehensive estate plan that ensures their legacy is preserved and their loved ones are taken care of.
Remember, consulting with legal and tax professionals is a wise step to navigate the intricacies of estate planning and ensure your specific needs and objectives are met.
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