Wills and Trusts: The Key Differences
Wills and trusts are two options to transfer your assets, but the key difference between these two documents is timing. A will goes into effect only after you die, whereas a trust becomes effective immediately. Let’s run through the basics of these two types of legal documents.
What is a will?
A will is a legal document used to direct the distribution of assets, and, when applicable, to appoint guardians for children. An attorney drafts your will and you can work with them to update it as frequently as needed to ensure it’s still applicable to your current situation.
What happens if you do not have a will?
When a person passes without a will, it’s called dying “intestate.” If this happens, the state distributes the deceased person’s assets according to the state’s laws. This means that the beneficiaries receive prescribed percentages based on the heirs that survived the decedent.
What are the basic components of a will?
A will is made up of several parts, and includes a testator, an executor, and a beneficiary. Here’s a brief explanation of these roles:
Testator: A testator is the person who creates a valid will to be executed upon their death.
Executor: An executor is a person who carries out the wishes of the testator according to the will.
Beneficiary: A beneficiary is a person or persons who inherit the assets and/or estate left by the deceased in the will. A beneficiary can also be an entity (e.g., charity, business, trust).
A will is prepared by the testator and signed in the presence of witnesses. To ensure the will is comprehensive and makes legal sense, it’s best to prepare a will with professional assistance from an attorney.
While a will covers many assets, there are several exceptions, such as life insurance payouts. Because life insurance policies name beneficiaries, the will cannot override that distribution.
A will is subject to the probate court, which takes time and costs money. A will also becomes a part of public record, which could be a privacy issue for people.
What is probate?
Probate is the legal process which distributes a deceased person’s estate as designated in their will or by state law or both.
When a person passes away without an established trust, the probate process typically proceeds as follows:
- The will or the probate court appoints a trust administrator or executor.
- The court determines if the will is valid, so it makes sense to draft your will with an attorney’s help. Your will must also have appropriate witnesses according to your state’s laws.
- Prior to the distribution of estate proceeds, all properties and assets must be inventoried and reported to the court. They cannot be sold nor distributed without court approval.
- All properties are appraised, and the assets are used to pay all debts and taxes that may exist. All of which is subject to court oversight and approval.
- Assets are distributed according to the will if a valid will exists and according to state law if a valid will does not exist.
Why do you want to avoid probate?
In addition to probate being a public process, it also allows beneficiaries and non-beneficiaries to challenge the will, leaving the fate of the will in the hands of the court. Probate is not a quick process. On average, it takes six to twelve months to complete. During the probate process, assets become “frozen,” meaning they can’t be utilized by beneficiaries.
What is a trust?
A trust is a legal agreement that takes effect as soon as you create it, unlike a will that only takes effect when the testator passes away. The trust distributes wealth at a point specified by the grantor.
Trusts are flexible (but do not have to be flexible) agreements that are easily customized to meet the needs of the grantor and the beneficiaries. Contrary to wills, trusts avoid probate court: they do not become public record and the family maintains a deeper level of privacy.
The Basic Construction of a Trust
The roles of people involved with a trust are similar to those of a will, but have slightly different terminology:
Grantor: The grantor is the person for whom the trust is created.
Trustee: The trustee is the person or business entity responsible for the execution of the trust on behalf of the grantor.
Beneficiary: The beneficiary receives distributions from the trust.
What are the different types of trusts?
A grantor establishes a living trust when they are alive, and the trust is revocable or irrevocable. Revocable trusts, which can be changed by the grantor during their lifetime have more flexibility than irrevocable trusts, which cannot be changed after they are executed. Both types avoid probate and help retain privacy.
A trust allows the grantor to decide who receives trust distributions and when. The trust gives complete control to the grantor, avoids probate, and helps create a comprehensive estate plan.
Not all people establish trusts ahead of time. Some trusts come into existence when the grantor dies, and their will directs the formation of a trust. This type of trust is called a testamentary trust.
When a person creates a will, they can specify the creation of a trust upon their death; this does not avoid probate. After assets named in the will go through the probate process, the trust is created.
Sometimes people choose to do a testamentary trust versus a revocable living trust because it seems “cheaper” upfront. However, the cost of probate court alone could render this untrue.
A properly established trust will maintain a grantor’s legacy while circumventing the time-consuming and often costly probate process. If you’re looking at the big picture, you can often save time, money, and mitigate family tension by establishing a trust.
At Live Oak Private Wealth, we ensure all your assets are correctly titled, living wills and power of attorneys are in place and that all of your existing estate documents are in line with your family’s wishes.
In addition to the trust and estate planning services included in our comprehensive financial planning, we offer families access to corporate trustee services. The Live Oak Private Wealth team, through a strategic partnership with Alliance Trust Company of Nevada, will help manage and protect your family’s wealth today and for generations to come.