Choosing the proper estate plan for you and your family is important, but it can also be stressful. Maybe you have heard of different types of planning instruments from friends or family, but you are unsure which one (or ones) is right for you. Below, we break down the differences between two common estate planning instruments: wills and trusts.
At its most basic, a will is a document, which provides how a person’s estate will be distributed after their death. At its most fundamental, a trust is “an entity created to hold assets for the benefit of certain persons or entities . . . .” For a general explanation of wills, click here. For a general explanation of trusts, click here.
The terminology concerning wills and trusts are similar, but it is important to understand the distinctions:
- Testator: person who created the will
- Beneficiaries: individuals or nonprofits who receive assets from testator’s estate upon the testator’s death
- Executor: individual or institution appointed by the testator who is charged with administering the estate upon the testator’s death
- Grantor: person or entity who created the trust
- Beneficiaries: individuals or nonprofits currently receiving or who will receive assets from the trust according to the trust provisions
- Trustee: person or institution appointed by the grantor to manage and distribute trust assets in accordance with trust provisions
Capacity to Create the Instrument
One important difference between a will and a trust lies in its creation. Both testators and grantors must have the requisite mental capacity to create either a will or a trust. However, the legal requirements for that mental capacity may differ. Often, a grantor who creates a trust is held to a higher mental standard than a testator who creates a will, explained below:
- A testator who creates a will must: (1) know who they are; (2) have a general understanding of the assets they own; and (3) know who the “natural objects” of their estate would be (i.e. spouse, children, parents, etc.). This is known as “testamentary capacity.”
- A grantor who creates a trust is often held to a higher standard called “contractual capacity.” Under this standard, a grantor must be able to communicate, understand, and appreciate: (1) the rights, duties, and responsibilities created or affected by his or her decision regarding the trust; (2) the probable consequences of the decision; and (3) the significant risks of, benefits of, and reasonable alternatives to the decision.
This is an important distinction of which to be aware because the validity of both wills and trusts may be attacked in court based on whether the testator/grantor possessed the proper mental capacity at the time the document was created.
Legal Ownership of Assets
Another important distinction between a will and a trust is how the property and assets to be distributed upon the testator/grantor’s death are treated during the testator/grantor’s lifetime. When a grantor creates a trust, they create a separate legal entity. Upon placing their assets into this legal entity, the property is no longer considered the grantor’s. Rather, the legal entity, the trust, now owns the property. For property to be included as “trust property,” the grantor must place the asset into the trust’s name. For example, if a grantor owns a home that they wish to put into the trust, the grantor will likely have to execute a new deed transferring the property over to the trust. Depending on the type of trust created, placing assets into a trust may provide the grantor with tax benefits.
Contrastingly, a will does not create a new legal entity. Any property or assets that are distributed under a will remain legally owned by the testator during the testator’s lifetime. Ownership over such assets are not transferred to a different legal entity, such as a trust.
Ability to Change Wills or Trusts
The ability to alter, amend, or cancel a will or a trust may also differ depending on the instrument. A will may always be amended or terminated if the testator retains the necessary mental capacity, discussed above. Whether a grantor may alter a trust depends not only on the grantor’s mental capacity, but also the type of trust created. With a revocable trust, the grantor may change the beneficiaries and provisions of the trust, remove assets from the trust, or even terminate the trust. However, under most circumstances, an irrevocable trust cannot be altered after its creation.
Timing of Asset/Property Distribution
The timing of asset distribution may also differ between a will and a trust. Under a will, property and assets will only be distributed upon the testator’s death. However, under a trust, assets may be distributed during the grantor’s lifetime, upon their death, or after their death, depending on the type of trust and the trust provisions. For example, with a revocable trust, a grantor is often also named as a beneficiary and may receive trust distributions during their lifetime. Upon the grantor’s death, the other named living beneficiaries of the trust receive the trust property in accordance with the trust provisions. The entire trust may be distributed upon the grantor’s death, or the trust may continue to hold assets and distribute said assets to beneficiaries for a certain period of time.
Perhaps the most widely touted reason to create a trust rather than a will is to avoid the probate process. “Probate” is the legal process for settling an estate, whether a person dies with or without a will. Probate is necessary to transfer ownership of assets and property from the deceased’s name to the beneficiaries’ names. During probate, a court will oversee the executor’s distribution of the deceased’s estate in accordance with the will. Creating a trust avoids this process. Probate is not required with trusts because the property being transferred is owned by the trust, not the grantor. Further, one of the crucial legal characteristics of a trust is that it has the power to transfer legal ownership interests in assets. Therefore, there is no need for court involvement.
There are two main advantages to avoiding probate. First, probate can be an expensive and lengthy process. An executor will likely be required to obtain court approval before acting on behalf of the deceased’s estate (for example, paying creditors and distributing assets). Contrastingly, a trustee most likely will not be forced to acquire court approval before acting in accordance with trust provisions. This may allow for the deceased’s estate in a trust to be distributed in a quicker, more cost-efficient manner.
The other advantage to avoiding probate is privacy. Because the distribution of an estate under a will is overseen by courts, probating a will is a public process. As trusts are managed outside the realm of the courts, the provisions of the trust and the distribution of its assets are kept private. The one exception to this is if a trust is contested and a lawsuit filed, which would be public information.
Using a Will and a Trust
Importantly, simply because you use one of these estate planning tools does not mean you are foreclosed from using the other. Depending on your situation, it may be wise to create a trust and a “pour-over will.” A pour-over will provides that any assets you owned at your death that are not within your trust, “pour-over” to your trust upon your death, effectively safeguarding against any need to probate a portion of your estate.
Important Things to Note
It is important to understand the difference between a living trust and a testamentary trust. A “living trust” (also called an “inter-vivos trust”) is likely what most people think of when they hear the term “trust,” and it is the type of trust discussed in this article. A chief characteristic of this instrument is that it is established during the grantor’s lifetime. Contrastingly, a testamentary trust is created within the testator’s will and upon their death. A testamentary trust directs the testator’s executor of their estate to create the testamentary trust. Thus, the testamentary trust does not take effect until the testator/grantor’s death.
It is also important to understand that a “living will” is not the same testamentary document as the will discussed in this article. People may confuse living wills with a will or a living trust. A living will does not provide for how your property and assets are distributed upon your death. Rather, it is an explanation of your wishes during your lifetime, specifically towards the end of your life. In a living will, you can explain your wishes concerning which medical procedures you may or may not want, should you ever be in critical condition and unable to communicate your desires to family or healthcare professionals. For example, if you suffer from a terminal illness and your heart stops beating, would you want to be resuscitated? Similarly, it can address issues of palliative care and organ donation.
Speaking with an Estate Planning Attorney
The above article is meant to be purely informational and does not constitute legal advice. When considering your estate plan, it is important that you speak with an estate planning attorney local to your area as the laws concerning wills and trusts vary by state. Further, because each person’s estate and desired plan are different, consulting with an attorney will help you create the best estate plan for you and your loved ones.
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- Trust, Law.Com, https://dictionary.law.com/Default.aspx?selected=2169
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- Revocable Trust, Investopedia, https://www.investopedia.com/terms/r/revocabletrust.asp
- Pour-Over Will, Investopedia, https://www.investopedia.com/terms/p/pour-overwill.asp
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- What is the Difference Between a Living and Testamentary Trust?, Baron Law, https://www.baronlawcleveland.com/wills-and-trusts/living-and-testamentary-trust/
- Living Will vs. Living Trust, The Balance, https://www.thebalance.com/living-will-vs-living-trust-3505198