You’ve probably heard about wills and trusts before, but do you really understand what they are and how they work? No?? Don’t worry. You’re not alone . . . not by a long shot.
It’s easy to feel out of the loop when someone at the dinner party starts throwing around terms like “revocable living trust” or “last will and testament.” You probably have felt like it’s something you should understand, so it can be hard to admit you’re a little lost.
In reality, most of us (including that guy at the dinner party) don’t have a firm grasp on these concepts. And with good reason – they’re rooted in complicated, centuries-old law and full of antiquated terminology. Most non-attorneys have a hard time explaining the differences between a will and trust (heck, even a lot of attorneys we’ve talked to don’t really understand how trusts work).
So, if you’re unsure about wills and trusts, know that you are not alone. And rest assured. We can help you understand, in plain language, the differences between these two documents and which document might be best suited for you and your family.
Wills vs. Trusts
Will. A will is a written document that is signed and witnessed. A will is considered a “death” document as it only goes into effect when you die. Let’s look at a few things a will does. A will:
- provides for the distribution of assets owned by you at your death
- names your choice of personal representative (executor) in the probate of your estate.
- allows you to appoint permanent guardians for your minor children
- tends to cost less than a trust at the outset but usually ends up costing more money and time to close out your estate after death.
A will does not:
- Avoid probate (more on that in a bit)
- Control assets directed to others through beneficiary designations, such as: life insurance, retirement benefits, or Payable-On-Death (POD) accounts
- Allow for management of your affairs if you are incapacitated
Trust. A revocable living trust is a legal entity that remains in place during your lifetime, during any period of disability, and after death. Because the trust is effective during your lifetime and you can change it, it’s referred to as a “living” trust. (There are other types of trusts, including “irrevocable” trusts, which can’t be changed. But most of the trusts used in estate planning are living trusts.) A living trust:
- Is designed to hold all of your assets. It does this by being fully “funded” (meaning assets like bank accounts and real estate are titled in the name of your trust)
- Avoids probate proceedings if fully funded
- Provides for the distribution of your assets after you die
- Allows for the management of your property after death or if you’re incapacitated
- Often includes protective measures or for beneficiaries and tax planning
- Permits you to revoke or amend your wishes during your lifetime
The Probate Process: Understanding the Key Difference Between a Will and Trust
The term “probate” literally means “proving.” It refers to the court proceedings where the person’s will is authenticated, outstanding debts are paid, and assets are transferred to beneficiaries.
Probate can take a long time – even years. It’s expensive, and the entire process is completely public. Although probate can be a useful avenue for resolving conflicts between heirs or claims of creditors, there are very few reasons why anyone would want their estate to go through probate.
Key Takeaway –
Some of it depends on your state’s laws and the makeup of your estate, but for most people, using a will as your estate planning tool will make probate a certainty.
The Bottom Line on Wills vs. Trusts
Everyone’s situation is unique. It’s important to consider your own situation to determine what planning strategy is right for you and your loved ones. For most, a living trust is a more efficient way to manage their estate. For others, a will is sufficient. Talking with a trusted estate planning attorney who can explain these important concepts in simple terms can help you decide what’s best for you and your family.