Whenever the topic of estate planning comes up, there are two terms you are guaranteed to hear in the discussion: wills and trusts. These two legal documents can rightly be described, correctly or otherwise, as the backbone of an estate plan. 

But what’s the difference? When is a will preferred over a trust, and vice versa? When can these tools work well together? As part of this week’s continued focus on estate planning, we figured that a primer of sorts is a good idea.  To answer some basic questions about wills versus trusts, we’re bringing you this helpful article from Investopedia, written by contributor Matthew Jarrell.  

As with any legal or financial terminology, one professional opinion can differ from another, so we’ve done our best to stick with the facts. We’ve also had to shorten Jarrell’s material somewhat, so if you’re looking for greater detail, we suggest reading the source material from Investopedia and consulting with your estate planning attorney. With that as a backdrop, let’s dive into Jarrell’s article. 

Wills and Trusts Can Have Similar Purposes, but Work Differently 

Jarrell begins at the beginning, explaining that wills and trusts can have a similar purpose, such as the disposition of assets, but they don’t work the same. 

“A will is a legal document that provides instructions for distributing property to beneficiaries after death,” Jarrell writes. The key phrase there is “after death,” since a will carries no authority until one passes away. 

By contrast, says Jarrell, a trust is “a legal structure that allows an individual (the grantor or trustor) to transfer assets to a trustee for management and distribution according to the grantor’s wishes,” often for the benefit of a beneficiary such as a spouse or special needs child. While some trusts take effect after one dies, other types of trusts can be used during a person’s lifetime.  

What’s more, a will and a trust often work in harmony. “Both can be practical estate planning tools, either separately or together,” Jarrell states. 

Some of the Key Differences Between a Will and a Trust 

Jarrell’s article contains several tables of information which we can’t easily reproduce here on the Blog. However, here’s a summary of what he says are key points of difference between these two estate planning documents. 

Cost and Complexity: A will can be written relatively inexpensively, from a very low-cost do-it-yourself will to a professionally-drafted document that costs $1,000 or more. Trusts are generally more costly because they can easily become more complex. Jarrell quotes a price range of $1,500 to $5,000 or more. Wills tend to be less complicated while trusts can require more documents and a more formalized set-up process. 

Effective Date: As noted above, your will takes effect after you die. A trust, however, comes into effect (as Jarrell writes) “once signed and funded,” either during your lifetime or after you pass away, depending on the purpose of the trust and the source of the funds. Jarrell adds that a trust often takes legal precedence over a will when the two disagree. 

Minor Children: In his Investopedia article, Jarrell writes that a will can contain language that stipulates who will care for your minor children should you pass away. This is generally called a guardianship. A trust “does not include guardianship provisions for minor children,” says Jarrell, but it can set aside funds designated for their care or assets that will pass to them once they reach a specified age. 

Taxes and Privacy: There is a significant difference in these areas between a will and a trust, Jarrell explains. Assets transferred by a will are generally subject to federal and state estate taxes, while certain types of trusts can reduce the tax burden and shield assets from creditors. Your will is also subject to probate, which is a public process. By contrast, says Jarrell, “Trusts bypass probate, offering more privacy for assets and beneficiaries.” 

Some Important Reasons Why You Need a Will 

Whether or not your estate plan requires a trust, most attorneys agree that everyone needs a will. 

“A will is a legal document that specifies how a person’s assets will be distributed to their heirs after death,” Jarrell writes. “It provides guidance for handling the estate, helping to prevent disputes among beneficiaries.” Also, as noted above, it can designate guardians for minor children. 

Dying without a will – called “dying intestate” – can cause serious and expensive complications. “If you die without a will,” Jarrell warns, “your estate will be subject to intestacy laws, meaning the court will decide how your assets are distributed.” Priority is given to close family members: a surviving spouse first, then to children, extended family, and descendants. However, if no family exists, says Jarrell, the property typically reverts to the state. 

There are Different Types of Trusts for Different Purposes 

Under the terms of a trust, Jarrell tells us, a grantor “transfers assets to a trustee, who manages the assets for the benefit of beneficiaries.” By law the trustee has to act as a fiduciary, which means they must honor the terms of the trust document. 

There are two broad categories of trusts, Jarrell explains. Living trusts can be used during the grantor’s lifetime, while testamentary trusts are generally set up through your will and become effective once you’ve died. 

Revocable Trusts Offer Greater Flexibility with Less Protection 

One major distinction between types of trusts lies in whether you as grantor can change your mind and alter the terms. That’s the basic difference between a trust that is “revocable” and one that it “irrevocable.” 

“A revocable trust,” says Jarrell, “is created during the grantor’s lifetime and can be altered, amended, or revoked at any time. The grantor retains control of the assets in the trust and can use, sell, or transfer them as desired.” 

While a revocable trust offers flexibility and control, it does have drawbacks.  For example, says Jarrell, “Assets in a revocable trust pass outside of probate but are included in the grantor’s taxable estate.” That means assets in a revocable trust are typically not protected from estate taxes or claims from creditors. 

Irrevocable Trusts: Giving Up Control to Gain Important Safeguards 

If a revocable trust can be altered, then the nature of an irrevocable trust should be clear: once created, it’s more or less set in stone. 

“An irrevocable trust cannot be altered or revoked once it is created,” Jarrell writes. “The grantor relinquishes control over the assets placed in the trust, and the assets are no longer considered part of the grantor’s estate for tax purposes.” 

With an irrevocable trust, you as the grantor are sacrificing control and flexibility. However, by relinquishing control, you gain important benefits. Assets in an irrevocable trust are generally protected from creditors since they’re no longer considered to be under your control. In a similar way, by removing these assets from your taxable estate, your tax liability should decrease. 

Two Different Trusts for Two Specific Purposes 

In his Investopedia article, Jarrell goes into detail on two types of trusts for specific purposes. We lack the space here on the Blog to include all of this material. Clearly, if you feel your estate plan might benefit from one of these trusts, we encourage you to seek professional advice from a qualified estate planning attorney. 

(We also encourage you to check out our companion article here on the Blog this week explaining Safe Harbor Trusts.) 

Charitable Trust: This is an irrevocable trust that benefits specific charities while providing some economic return to their grantor or beneficiaries. A charitable remainder trust is a common form of this type of arrangement. This tool allows you to reap tax benefits by transferring assets to a charity or charities while still generating some income from those assets. 

Special Needs Trust: This type of trust “enables individuals with disabilities to receive financial support from the trust for particular purposes without jeopardizing their eligibility for federal and state public assistance programs,” Jarrell writes. These assistance programs can include Medicaid and Supplemental Security Income (SSI). A special needs trust allows trust assets to be used to meet the beneficiary’s needs beyond what public assistance covers. 

In both cases, trusts have to be set up and funded with care. Proper legal and financial assistance is an absolute must.  

Final Analysis: Consider a Trust, but Draft a Will 

So, in the final analysis, it seems that not everyone has to set up a trust, but everyobne does need a will. 

“A will may be the least expensive and most efficient choice for small estates with easily transferred assets and simple bequests,” says Jarrell. “A trust without a will can present problems concerning assets outside the trust that become subject to intestacy laws. Larger and more complex estates may benefit by using both arrangements.” 

He cautions that, even if most of your assets are held in ways that avoid probate, a proper will is always wise. “A will and a trust can complement each other,” Jarrell adds. These documents “allow swift asset transfers, maintain confidentiality concerning sensitive assets and directives, and prevent intestacy concerning estate assets whose disposition isn’t governed by a trust or other arrangement for individuals of means and those with privacy concerns.” 

Jarrell’s last words contain good advice: “Careful use of wills, trusts, or both can ensure that assets and possessions are distributed as intended. Making an estate plan a priority can save time, money, and help loved ones avoid potential financial hardship and conflicts.” 

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(originally reported at www.investopedia.com)