Estate planning allows individuals to determine how their assets will be distributed upon their passing and how their financial affairs will be managed. Two commonly used instruments in estate planning are wills and trusts. While both serve the purpose of asset distribution, they have distinct differences in structure, function, and application. This article will review the key differences between wills and trusts in estate planning.
What is a Will?
A will, also known as a Last Will and Testament, is a legal document that outlines a person’s wishes regarding the distribution of their assets and the management of their estate upon their death. It is one of the most common and straightforward tools in estate planning.
The function of a Will
A Will specifies how a person’s assets, such as property, bank accounts, investments, and personal belongings, should be distributed among beneficiaries, including family members, friends, or charitable organizations. It also allows the appointment of an executor responsible for executing the wishes outlined in the Will.
Key Features of Wills
- Wills are revocable, meaning they can be changed or revoked at any time during the testator’s lifetime.
- They come into effect upon the testator’s death.
- Wills are typically subject to probate, a legal process that validates the will and oversees its administration in court.
What is a Trust?
A trust is a legal arrangement where a person (the grantor or settlor) transfers their assets into a trust, which a trustee manages. The trustee holds and administers the assets on behalf of the beneficiaries according to the terms specified in the trust document.
The Function of a Trust
Trusts serve various purposes, such as asset protection, estate tax planning, and ensuring the efficient distribution of assets. Unlike wills, trusts can manage assets during the grantor’s lifetime and after death.
Key Features of Trusts
- Trusts can be revocable or irrevocable. Revocable trusts can be altered or terminated by the grantor, while irrevocable trusts typically cannot be changed without the beneficiaries’ consent.
- Trusts can be used to avoid probate, providing a more private and efficient way of transferring assets.
- They can include various types, such as living trusts, testamentary trusts, special needs trusts, and charitable trusts.
Key Differences Between Wills and Trusts
Probate Process
One of the most significant differences between wills and trusts is their involvement in the probate process. Wills are typically subject to probate, a court-supervised process that validates the will settles debts and taxes and oversees the distribution of assets. On the other hand, trusts can often bypass probate, allowing for a more streamlined and private asset transfer.
Timing of Asset Distribution
Wills come into effect upon the testator’s death, and asset distribution occurs after the probate process is complete. In contrast, trusts can facilitate the immediate transfer of assets upon the grantor’s death or during their lifetime, depending on the type of trust.
Flexibility and Control
Wills are highly flexible and can be updated or revoked as needed. They provide a straightforward way to specify beneficiaries and distribution instructions. Trusts offer a higher level of control, allowing the grantor to dictate how assets are managed and distributed, even after their passing. Irrevocable trusts, once established, offer less flexibility but can provide asset protection benefits.
Privacy
A will becomes a public record during probate, meaning anyone can access information about the deceased’s assets and beneficiaries. Trusts, especially revocable living Trusts, offer greater privacy, as they are not subject to probate and remain private documents.
| Feature | Will | Trust |
| Definition | A legal document that outlines how a person’s assets should be distributed after death. | A legal arrangement where assets are held by a trustee for the benefit of designated beneficiaries. |
| When It Takes Effect | Only upon death. | Can take effect during the grantor’s lifetime (inter vivos trust) or upon death (testamentary trust). |
| Probate Requirement | Subject to probate, which can result in delays and probate fees. | Typically avoids probate, leading to quicker asset distribution. |
| Privacy | Becomes a public record upon probate. | Remains private and does not go through probate. |
| Control Over Assets | Assets are controlled by the estate executor after death. | Assets are managed by the trustee as per the terms set by the grantor. |
| Flexibility | Can be updated or revoked anytime before death. | Inter vivos trusts can be revocable or irrevocable; testamentary trusts are created by a will and become irrevocable upon death. |
| Costs | Lower upfront cost but may involve probate fees later. | Higher initial setup costs but can save on probate fees and estate taxes. |
| Creditor Protection | Offers limited protection from creditors. | Can provide asset protection if structured properly. |
| Tax Considerations | Assets are subject to estate administration tax (probate tax). | May provide tax benefits, especially for income splitting and avoiding probate tax. |
| Ongoing Management | Ends with the distribution of assets after probate. | Can provide long-term asset management and control. |
| Common Uses | Distributing assets to beneficiaries upon death. | Managing assets for minors, individuals with disabilities, or providing structured distributions over time. |
Choosing the Right Estate Plan
The decision between using a will, a trust, or a combination of both depends on individual circumstances and goals. Factors such as the size and complexity of the estate, the desire for privacy, and the need for ongoing asset management play a significant role in this choice. Here are some factors to consider when deciding between a will and a trust:
- Size and complexity of the estate: Larger and more complex estates may benefit from the detailed asset management and tax planning advantages offered by trusts. Conversely, smaller estates might find a will to be a more straightforward and cost-effective solution.
- Privacy concerns: If maintaining privacy is a priority, a trust may be the better option, as it avoids the public probate process. Wills, on the other hand, become public records, which might not be desirable for everyone.
- Need for ongoing asset management: Trusts provide a mechanism for managing assets during your lifetime and after your death, which can be particularly useful if you want to ensure continuous support for beneficiaries or become incapacitated.
- Cost considerations: While trusts offer many benefits, they can be more expensive to establish and maintain than wills.
- Flexibility and control: Wills offer flexibility and can be easily updated, while trusts provide more control over how and when assets are distributed.
Ultimately, the decision between a will, a trust, or a combination of both should be made in consultation with an experienced estate planning lawyer. They can provide personalized advice and help you create an estate plan that meets your unique needs and objectives.
Summary
Estate planning is a dynamic process; periodic reviews are essential to ensure that your plan remains aligned with your evolving circumstances and goals. By consulting with legal professionals and tailoring your estate plan to your specific needs and objectives, you can ensure that your wishes are carried out effectively and efficiently, providing peace of mind and financial security for your loved ones.
If you need assistance from a wills and estates lawyer, contact us today and book a consultation.
The information provided above is of a general nature and should not be considered legal advice. Every transaction or circumstance is unique, and obtaining specific legal advice is necessary to address your particular requirements. Therefore, if you have any legal questions, it is recommended that you consult with a lawyer.
