Understanding Wills and Trusts
Two of the most well-known estate planning tools are wills and revocable trusts. Many people, however, misunderstand the role of each in comprehensive estate planning. Here is a more in-depth look at the key differences between a will and a trust—and why both represent an important part of a comprehensive estate plan.
Characteristics of a will
A will is a written document that indicates how you would like your assets distributed upon your death. In other words, it is essentially instructions to the probate court on how to allocate your assets during the probate process. Through a will, you may also designate a guardian for minor children. You can amend or revoke a will at any point during your lifetime.
In short, a will can:
- Indicate how you would like your assets distributed upon your death
- Designate a guardian for minor children
- Be altered during your lifetime
Characteristics of a revocable trust
A trust is a written document that gives specific instructions about how assets should be handled. The person who makes the trust is the trustmaker (also referred to as settlor, grantor, or trustor); the person who handles the assets is the trustee, and the person who receives the benefits of the trust is the beneficiary. Often, the trustmaker will wear all three hats during his or her lifetime. The trustmaker will then typically designate successor trustees and beneficiaries for when they die or become incapacitated. Through a trust, you may actually bypass the probate process. One other unique aspect of trusts is that the transfer of assets through a trust help the assets remains private.
The world of trusts can be a little more complicated, especially because there are so many different types. You may set aside a portion of your assets for a specific purpose through a pet trust, special needs trust, or burial trust, for example. Then, there are two broader categories of trusts to consider: revocable trusts and irrevocable trusts. Revocable trusts can be altered during the course of your lifetime, while irrevocable trusts cannot. Then you have the term “living trust,” which is used interchangeably with the terms “revocable trust” and “revocable living trust.”
In discussions about the differences between a will and a trust, the type of trust often being referred to is a revocable living trust.
In short, a (revocable living) trust can:
- Indicate how you would like your assets handled upon your death or incapacity
- Designate a trustee and beneficiaries for when you die or become incapacitated
- Bypass the probate process
- Be altered during your lifetime
- Keep the transfer of your assets private
How wills and trusts work together
A will does not go into effect until a person’s death, and it does nothing if someone becomes incapacitated during his or her lifetime. Moreover, having a will does nothing to allow your loved ones to bypass the probate process. Therefore, many people choose to establish a pour-over will together with a revocable living trust. The pour-over will ensure that any property left out of the trust is poured into the trust at the end of someone’s lifetime. The trust, meanwhile, specifies trustees and beneficiaries and handles cases of incapacity. So, while a trust can be used in place of a will, many estate planning experts will advise you to consider incorporating both a will and a trust in your estate plan.