Estate planning is a crucial aspect of securing your assets and ensuring your loved ones are taken care of after you pass away.
Two primary instruments used for estate planning are trusts and wills. Although both serve similar purposes, they have distinct features that cater to different needs.
In this blog, we’ll explore the key differences between trusts and wills, helping you make an informed decision about which estate planning tool is best suited for your unique situation.
Definition and function
A will, also known as a last will and testament, is a legal document that outlines your wishes for the distribution of your assets upon your death.
It appoints an executor, someone responsible for managing the estate and ensuring the terms of the will are carried out.
A will only becomes effective upon your death and goes through the probate process, which is the court-supervised distribution of assets.
Meanwhile, a trust is a legal entity that holds and manages assets on behalf of beneficiaries.
It involves three key roles:
- the grantor (the person creating the trust)
- the trustee (the individual or institution managing the trust)
- and the beneficiaries (those who will receive the trust assets).
A trust can be
- revocable (modifiable during the grantor’s lifetime)
- irrevocable (cannot be modified once established).
Wills must go through the probate process, which can be time-consuming, costly, and subject to public record.
Probate proceedings can take several months to a year or more, delaying the distribution of assets to beneficiaries.
Trusts bypass probate for assets held within the trust, as the assets are owned by the trust and not the individual.
As a result, the distribution of assets to beneficiaries is typically faster, more private, and less expensive.
Wills become part of the public record during probate, meaning the details of your estate, beneficiaries, and assets become accessible to the public.
Trusts offer greater privacy since they do not go through probate. The distribution of assets and beneficiaries’ details remain confidential.
Management of assets during incapacity
Wills only take effect upon your death and do not provide any guidance or management of assets during your lifetime if you become incapacitated.
Revocable living trusts can be designed to manage assets during your lifetime, even if you become incapacitated. The appointed successor trustee steps in to manage the trust assets according to your wishes, avoiding the need for a court-appointed conservatorship.
Flexibility and control
Wills offer flexibility in distributing assets, but once you pass away, the terms of the will become fixed and cannot be changed.
Revocable trusts allow you to modify or revoke the trust during your lifetime if your circumstances change or if you wish to amend your beneficiaries or assets held within the trust.
While drafting a will is generally more affordable than creating a trust, the costs associated with probate proceedings can be higher, potentially reducing the overall value of the estate.
Establishing a trust may have higher upfront costs, but the avoidance of probate can lead to cost savings in the long run.