Should I create a will or a trust?
Knowing that you should plan for the end of your life is one thing. Actually doing it is another. Most of us aren’t just held up by the emotional discomfort of contemplating our own death. We also get bogged down in the decisions and the details.
One of the most common questions about estate planning is whether someone should create a will or a trust. We can’t answer for you, but we can help you understand the pros and cons of each so that you can make an educated decision.
The differences between a will and a trust
The primary purpose of a will and the primary purpose of a trust are the same: to name the beneficiaries who will receive your assets. However, wills and trusts operate quite differently.
A will is a document that tells people — the court, the executor, heirs — how to distribute an individual’s assets after they are deceased. A will does not go into effect until the will is proven valid in court after the creator’s death.
Probate is the court-supervised process that determines the validity of a will and oversees the transfer of assets to the legal heirs. In fact, the word “probate” means “to prove,” and a will is not technically in effect until it has been proven.
A trust, on the other hand, is more than a document. It is a legal arrangement where a person or an institution (the trustee) holds the legal title to property on behalf of someone else. As opposed to a will, a trust goes into effect immediately upon its creation. In most instances, the creator of the trust receives income from the trust during their life, and when they die, the remainder of the trust goes to the intended beneficiary.
The pros and cons of using a will
Now that you know the basic difference between a will and a trust, let’s talk about the pros and cons of each.
The benefits of using a will
The biggest benefit of creating a will is that it’s pretty simple to do.
- Creating a will is administratively simple — it generally only requires the signatures of two witnesses who are not beneficiaries. The will also covers any assets that are solely in your name when you die. You don’t have to specify certain assets or do anything special with them to make sure they’re included. If you say, “I want to leave everything to Jim,” then everything in your estate (after paying debts and taxes) will go to Jim.
- You can amend a will at any time during your life. Because your will does not go into effect until your death, you can make as many changes to it as you’d like. Any new versions have to be properly witnessed, but you are not limited in your ability to modify it.
- You can use your will to appoint a guardian for minors. In fact, many people’s motivation for drafting their first will is to name a guardian to care for their children if a tragedy occurred.
- You can use a will to name an executor to manage your estate. That person would be responsible for all the tasks that are required to transfer ownership from the deceased to their estate and ultimately, to any beneficiaries.
- You can use a will to name someone to manage any assets left to or earned by minors.
The drawbacks of using a will
The number one drawback of relying solely on a will is that wills do not keep your assets from going through probate.
- Assets that are included in a will pass through probate. Probate can be a long and expensive process, and in some cases, going through probate can reduce the assets available to beneficiaries.
- Information in a will cannot be kept private. A will becomes a public record once it is entered into probate.
- You cannot use a will to leave assets to a minor without setting up a testamentary trust through the will or naming a custodian to be responsible for those assets.
- You cannot use a will to appoint someone to make decisions for you if you become incapacitated, though you can do that with additional documents, such as a power of attorney or healthcare proxy.
The pros and cons of using a trust
Many people believe that trusts are only used by the extremely wealthy. While those with high net worths do often create trusts, these legal structures have benefits that could be helpful to even those with smaller estates.
The benefits of using a trust
For most individuals, the biggest benefit of a trust is that the assets in a trust don’t have to go through probate.
- Assets included in a trust pass outside probate. As we stated above, probate can be a long and expensive process. Removing assets from that process saves your loved ones time and money. It also means that the assets within the trust transfer directly to the beneficiary without any interference by a court.
- Trusts can remain private. Because assets in a trust do not have to go through probate, the trust does not become a matter of public record.
- Trusts can provide tax savings. Assets placed within an irrevocable trust are not subject to estate tax when they are disbursed.
- Trusts can be used to protect funds for someone who is a minor or who has a disability.
- You can use a trust to plan for any potential incapacity by naming someone to manage your affairs.
- Successfully challenging a trust is much harder than challenging a will, though neither is easy.
The drawbacks of using a trust
Trusts provide a significant number of benefits, but they do require a bit more time, money, and energy to set up than simply drafting a will.
- Trusts are more administratively burdensome. For assets to be included in a trust, they must be put into the trust — actual transfer of property must occur or the trust is useless.
- A trust’s purpose is limited to the management and disbursement of assets. You can’t use a trust to name guardians for minors or specify funeral arrangements.
- Creating a trust is generally more expensive than creating a will because a trust must be managed once it is created.
- You cannot use a trust to name an executor. You can name a successor trustee, but they can only manage assets included in the trust — not your entire estate, unless your entire estate is included in the trust.
- Irrevocable trusts cannot be changed once they are created. (Revocable trusts can be modified up until the grantor’s death).
Issues to consider when deciding between a trust and a will
As you begin the estate planning process, asking yourself a few questions about your expectations can help you decide your next steps.
- Are you prepared to make an upfront expenditure of cost and energy?
- Do you qualify for a small estate threshold, meaning you could benefit from simplified probate procedures?
- Are there individuals for whom you would need to provide extra care?
Assets that you place into a trust will not be included in your will, but having a trust and having a will are not mutually exclusive. For instance, an individual that uses a trust to manage their assets may also choose to create a will that provides for their child’s guardian.
Most people would benefit from creating a will. They are relatively simple and straightforward, and we recommend drafting a will as the bare minimum that each person should do to safeguard their assets and their loved ones.
Some people would also benefit from creating a trust, either because a trust would allow their loved ones to avoid the probate process or because they want to provide extra care for a minor or someone with special needs.
However you choose to manage your estate, the most important thing is that you do it — don’t leave an administrative mess for those you love. Our estate planning package is a painless and affordable way to plan for the future. Contact us now.