The Difference Between a Trust and a Will?
You might have heard the terms “will” and “trust,” but you’re unsure about the distinction. Once you understand the difference, you’ll be able to make a more informed decision about your estate planning.
What’s a Will?
A last will and testament, often referred to as a will, is a legal document that outlines how a person would like their assets, such as their home and money, to be distributed after they pass away, says USA.gov. The will also identifies a person who is in charge of managing these assets until this distribution takes place, according to Forbes.
The person who creates the will is known as the “testator.” The people and organizations who receive the assets are called “beneficiaries.” And, the person who manages the assets until distribution is called the “executor,” according to USA.gov.
A will must get sent to a probate court after the testator passes away, says CNN Money. This is referred to as the will being “in probate,” or pending approval by the court, and this step can last for several months or years. The beneficiaries cannot receive the assets or property until this step is complete.
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What’s a Trust?
In general, a trust is an arrangement in which one party, the trustor, allows another party, the trustee, to hold the title to their assets on behalf of a beneficiary, says USA.gov.
Trusts allow the trustor to create conditions around how their assets are distributed. For example, let’s say you’re a parent of a minor child. You may create a trust and set a condition that your child will only receive the money after the age of 18. In this example, you are the “trustor,” an attorney may act as the “trustee,” and your child is the “beneficiary.”
There are two main types of trusts: testamentary trusts and living trusts, says Investopedia.
A testamentary trust is set up within a will. The trust is created upon the death of the trustor and the execution of the will. This trust technically does not exist during the lifetime of the trustor. Rather, the trustor specifies within her will that a trust should be created upon the will’s execution.
A living trust, as the name implies, is a trust that’s created while the trustor is still alive. Assets in a living trust may be able to pass outside of the probate process, which saves time and money. There are two types of living trusts, revocable and irrevocable.
- A revocable living trust allows the trustor to change the terms of the trust or terminate the trust during her lifetime.
- An irrevocable living trust is one the trustor cannot change once it’s established. This type of trust generally allows estate taxes to be minimized or avoided, says Investopedia.
Trust vs. Will: What Are the Differences?
Wills are limited in their power. The beneficiary designations marked on financial accounts, such as a 401(k), take precedence over what is directed in a will, says CNN Money. If a person passes away and names one beneficiary on her retirement account but a different beneficiary in her will, the person named on the retirement account will be able to claim the funds.
Wills also cannot be used to instruct how money should be handled if the testator loses mental capacity. Instead, you can use an advance healthcare directive or a durable power of attorney. A revocable living trust, by contrast, can also specify how money should be treated if the testator loses mental capacity.
Furthermore, wills cannot be used to specify when and how beneficiaries should receive funds. On the other hand, trusts can be set up with specific instructions, such as not releasing funds to beneficiaries until they reach a certain age, according to The Balance.
You can think of a will as considered direction for the probate court. The testator creates the will, and based on the information within that will, the probate court understands the desires of the deceased.
A trust, however, involves a retitling of assets. Both testamentary trusts and living trusts allow the trustor to defer this retitling until after their death.
A living trust allows property to pass to beneficiaries outside of probate court. As a result, the beneficiaries can be spared both the time commitment and the costs (such as attorney’s fees) associated with the probate process, says Investopedia.