What is the difference between a Will and a Trust? #

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Last Will and Testaments (Wills) and Living Trusts (Trusts) are both extremely useful estate planning tools, but generally serve different purposes. Many families need both – a Will and a Trust – but a Will may be enough for a family who does not (yet) require the level of protection a Trust provides for their assets. Families who find that they need a Trust will typically also need a Will – especially if they have minor children.  Let’s review the differences between a Will and a Trust, and go through the benefits and limitations of each so you understand the purpose and benefits of each tool. 

KEY DIFFERENCES – Will vs. Trust #

GRAPHIC

What is a Will? #

A Last Will and Testament (Will)  is a set of instructions to help loved ones settle your estate after you die.

In essence, your Will becomes your voice after you die, and it’s the final word* on how your belongings will be handed down. 

*IMPORTANT NOTE:  POD/TOD (payable or transferable on death) account designations take precedence and override any instructions in your Will.

A Will can…

• Convey your final wishes to your loved ones including:
• How, and to whom you want your personal belongings to go to, and include plans for sentimental keepsakes or jewelry; you may also leave money or items (like artwork, clothing, or furniture) to your favorite charity;
• include instructions for matters that will require decisions after your death, such as 

• the appointment of an Executor
• the Legal Guardians for minor children
  • and/or specify that certain assets are held for the benefit of particular persons, for example, for minor children until they reach majority or a specified age, 
• directions for your funeral and burial or disposition of your remains,
• instructions for the care of other dependents or pets you may leave behind.

Note: If you die without a Will, known as dying intestate, you’ll have no control over how your things are divided. All the property you own at the time of your death will be distributed according to the laws of the state where you live.

The author of a Will is called the Testator.  The Testator names an Executor to carry out the final wishes included in their Will. 

An Executor is a Fiduciary, which means they are legally obligated to handle the estate and its assets in accordance with the terms of the Will, and solely for the benefit and best interests of the Testator and the beneficiaries of the estate.

Your estate must go through a public legal process called Probate to be carried out when you have a Will. 

PRO-TIP:  A Will can include something called a Testamentary Trust, which is a kind of Trust that is created in the Will, but does not go into effect until the passing of the Testator. The assets are only transferred to the Testamentary Trust after the Testator’s passing, then managed by a Trustee on behalf of the beneficiaries.  This type of Trust can be useful when there are minor children or beneficiaries who are unable to manage the assets on their own. 
Read more on the difference between a Testamentary Trust and Living Trust below.

What is a Living Trust? #

A Living Trust is also a set of instructions to help loved ones settle your estate but can protect your assets while you are alive, as well as, after your death. 

Trusts are useful legal arrangements often used in estate planning, but unlike a Will, a Living Trust can manage and protect your asset(s) from risks like creditors, divorce, and lawsuits while still alive, as well as help your family avoid Probate and unnecessary estate taxes. Like a Will, a Living Trust includes specific instructions on how those assets should be transferred to your intended beneficiaries after your death. 

A Trust can…

• protect your assets from lawsuits, divorce, and creditors during your lifetime,
• provide a private, flexible, and efficient way to manage and distribute those assets to your intended beneficiaries after your death, and
• avoid the public, costly, and time-consuming public Probate process required for administering Wills

A Trust will include details about the…

• purpose of the Trust
•  the types of assets that can be held in the Trust
• The Trustees and Successor Trustees who are authorized to manage the assets, as well as, 
• the duties, responsibilities, powers and limitations of the Trustees, and
• designate beneficiaries who will receive the assets after the Grantor dies.

The Grantor of a Trust is the author of the Trust. The Grantor names a Trustee to manage the assets held in the Trust during their life, and a Successor Trustee to serve in their place after their death or incapacitation (*often, you will serve as both the Grantor and Initial Trustee of your Trust).  

A Trustee is a Fiduciary, which means they are legally obligated to handle the Trust assets in accordance with the terms of the Trust document, and solely for the benefit and best interests of the beneficiaries.

HOW DOES IT WORK?  Because the Trust assumes ownership of the assets (once transferred into it), those assets are technically no longer the Grantor’s personally owned property, and therefore protected from risks like lawsuits, divorce, and creditors, and also not a part of their estate at death – therefore, do not have need to be Probated to transfer to their heirs, which can also help avoid or minimize potential estate taxes. Because the Grantor can serve as their own Initial Trustee, they are able to continue enjoying the use of the assets while alive – as though nothing changed. 

PRO-TIP:  Unlike Wills which take effect upon death, Trusts become effective as soon as the asset is transferred to it.

*This is why maintaining ‘asset alignment’ is vital to a Trust’s ability to perform its job. 

PRO-TIP:  If you do not transfer your assets into the name of the Trust, those assets cannot and will not be protected or controlled by the Trust, or be under the Trustee’s management. You MUST maintain Asset Alignment throughout your lifetime in order for your Trust to ‘be funded’ and work the way it was designed. 

There are 2 Types of of Living Trusts: 

• REVOCABLE: A revocable living Trust is the most commonly used Trust for estate planning purposes because it allows you to maintain control over the Trust and make changes during your lifetime. This means you can add or remove assets, change beneficiaries, or even revoke the Trust entirely if you wish. With this kind of Trust, the Grantor can assign themselves as the Trustee or appoint a third party.

But because you still retain control over the assets in a revocable Trust, they’ll be considered part of your estate for tax purposes. When the assets get distributed, your beneficiaries must pay estate taxes.

• IRREVOCABLE: An irrevocable living Trust cannot be changed or revoked once created. When you transfer ownership of the assets to the Trust, you give up control over them, and you must appoint a third party as the Trustee. This also means you can’t change the terms of the Trust or access the assets unless you meet certain criteria.

One main advantage to giving up control over your assets to an irrevocable Trust is protection from creditors. For example, if you borrow money and aren’t able to pay back the loan, a lender can’t get their payment from assets held in an irrevocable Trust. Another benefit of an irrevocable Trust: since you no longer own the assets, they are not considered part of your estate, which can have potential estate tax benefits. 

TESTAMENTARY VS. LIVING TRUSTS

There are 2 basic types of Trust, the  Living Trust and Testamentary Trust. 

A Living Trust is created while you are still alive while a Testamentary Trust is created after your death.