Differences Between Wills and Trusts
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People often get confused between wills and trusts because they know they both have something to do with giving your assets to other people, but these two documents, although sometimes related, are very different and serve different purposes.
A will is a legal document that basically does four things:
- It gives your instructions and wishes as to how your assets and property are to be distributed after you die It is a statement that must be written, signed and witnessed in compliance with your state’s laws.
- It names your beneficiaries, the people you want to benefit from your assets, as well as details of your possessions.
- It allows you to choose an executor. A will allows you to choose a person to manage the distribution of your assets. If you don't have a will, a court-appointed person called an administrator will distribute your assets.
- You may choose a guardian to finish raising your children. Even if you are a young adult with few assets, you should have a will if you have children. A will can be used to appoint a guardian to care for your children if you die while they are still minors.
If you die without having made a will, you have died intestate. In that case, the court will distribute your property and determine the beneficiaries. The court may not rule according to your wishes, so dying intestate is not good for your beneficiaries. Further, without the guidance of a will, the court will name the guardian for your minor children, perhaps your brother when you would have much preferred your best friend.
After one dies, often a will goes through probate, the process by which the court transfers legal title of property from the decedent's estate to his or her beneficiaries. The probate court determines if your will is valid, hears any objections to the will, orders that creditors be paid, and supervises the process to assure that remaining property is distributed in accordance with the terms and conditions of the will.
If a person dies intestate, the probate court appoints someone to receive all claims against the estate, pay creditors and then distribute all remaining property in accordance with the laws of the state. The major difference between dying testate and dying intestate is that an intestate estate is distributed to beneficiaries in accordance with the distribution plan established by state law while a testate estate is distributed in accordance with the instructions provided in the decedent’s will (after payment of debts, taxes and costs of administration).
The probate process can take several months to conclude and transfer property to your beneficiaries with or without a will, but likely longer without one.
For the different types of wills, read Types of Wills.
In general, a trust is a legal relationship, represented by a legal document, in which one person (or qualified trust company), the trustee, holds property for the benefit of another, the beneficiary. The property can be any kind of real or personal property--money, real estate, stocks, bonds, collections, business interests, personal possessions and automobiles. One person may establish a trust to benefit himself or another person. Click here for an article on the different forms of trusts.
A trust generally involves at least two and often more people: the grantor, who creates the trust and is also known as the settler or donor; the trustee, who holds and manages the property for the benefit of the grantor and beneficiaries; and one or more beneficiaries who benefit from the trust. In some states, you can name yourself as trustee, so that you are able to control the trust's assets. However, if you are the trustee, the IRS requires you to report any trust income on your personal tax return. After your death your trust is passed on to the successor trustee you named in your original trust. The successor trustee will be responsible for taking care of the assets and passing them on to your beneficiaries.
Though assets are placed "in" a trust, they don't actually change location. A trust is a form of ownership that holds assets for your benefit and is so stated on whatever possessions are placed in trust. Your car title, for instance, would list the owner blank as "the George Myers trust." Entire bank and brokerage accounts, as well as homes and other real estate, are often put into a trust. After your trust comes into being, your assets will still be in the same place they were before you set up the trust--the car in the garage, the money in the bank, the land where it always was--but with a different owner: the George Myers trust, not George Myers.
The most common reason for people to make a trust is to keep their property from going through probate when they die. Unlike a will, which goes into effect when you die, your properties are transferred to certain types of trusts while you are still alive and the trusts continue to hold the properties after your death. Although you no longer own the assets, because your trust does, you still have access to the assets during your lifetime. You instruct your trust to pay income to you, and, on your death, your trustee (or successor trustee, if you were the original trustee) is instructed to divide whatever is left to your beneficiaries, according to your instructions. No probate!
How Are Wills and Trusts Related?
Some trusts, called living trusts, or inter vivos trusts, are separate from your will and are often used in place of a will to avoid probate. Living trusts are not related to wills and can be revocable or irrevocable. Most are revocable, which means that you can add or remove assets from the trust whenever you want, or you can terminate the trust. An irrevocable trust cannot be changed or dissolved once it has been set up. Because the grantor gives up control over the assets in this type of trust, irrevocable trusts are not attractive to most people. They are useful, however, for life insurance planning and for setting aside an education fund for children. Although a revocable living trust does not provide your estate with tax advantages or protect it from your creditors, an irrevocable living trust does. Both kinds of trusts avoid probate.
One type of trust, called a testamentary trust, is not only related to, but it is actually connected to your will. This type of trust does not avoid probate. While you're alive, a testamentary trust exists only on paper. After you die, however, the trust is activated, and after the assets you've earmarked for it go through probate, they are placed in the trust for your beneficiaries. Because a testamentary trust does not come into existence until you die, it is always irrevocable after that point. But while you're alive, just as you can revoke or change your will, you can revoke or amend any testamentary trusts you include in your will.
Many parents use testamentary trusts to help provide for their young children, especially if they do not want the gifts left to the children to be handed over all at once or given as a lump sum. Additionally, people with substantial estates often use testamentary trusts to minimize estate taxes and help protect their property from creditor claims.