What are the Differences Between Wills and Trusts?
What are the Differences Between Wills and Trusts?
Inheriting from a will and inheriting through a trust can mean very different things. While both are common estate planning vehicles, wills and trusts differ in their structure and in the opportunities they present as estate planning tools.
Posted on March 27, 2024 by Katherine Fox.
What are the Differences Between Wills and Trusts?
Is it the same if you inherit from a trust versus a will?
Inheriting from a will and inheriting through a trust can mean very different things. While both are common estate planning vehicles, wills and trusts differ in their structure and in the opportunities they present as estate planning tools.
Understanding the ins and outs of wills and trusts isn’t an easy road to navigate alone.
If you’re:
Working to understand what you have inherited
Trying to gather information about your parents estate plan
Building a plan to pass wealth to your own heirs
You should have a team around you that supports your vision and education.
If you need to learn more quickly, download the 20 Terms Inheritors Need to Know or reach out to Katherine to discuss your questions.
What is the purpose of a will versus the purpose of a trust?
A will is a legal document that outlines how a person's assets and property should be distributed after death.
It can be a long, detailed list of bequests or a simple, short document.
Generally, if a person has any estate documents, they will at least have a will.
A trust is a legal entity that holds and manages assets for the benefit of beneficiaries, who are specific individuals or entities.
Trusts can be created during someone’s lifetime or after their death as part of a will.
What are the Differences Between Wills and Trusts?
What are the different types of wills?
While a will is a legal document that has a prescribed structure and function, it can be set up to fulfill different purposes:
Simple Will
This is the most basic type of will and is suitable for individuals with relatively straightforward estates. A simple will typically outlines how a person's assets and possessions should be distributed after their death. It may also name an executor to carry out these instructions.
Testamentary Trust Will
This type of will establishes a trust (“testamentary trust”) within the will itself. At death, assets are transferred into the trust, and the trust terms dictate how those assets will be managed and distributed to beneficiaries. Testamentary trusts are often used to manage assets for minors or individuals with specific needs.
Pour-Over Will
A pour-over will is used in conjunction with a living trust. It directs that any assets not already placed in the trust during the individual's lifetime should "pour over" into the trust upon their death. This helps ensure that all assets are managed and distributed according to the trust's terms.
Living Will
Also known as an advance healthcare directive, a living will is a misnomer and is not related to the distribution of assets. Instead, it outlines a person's wishes regarding medical treatment and life-sustaining measures in case they become incapacitated and cannot communicate their preferences.
What are the different types of trusts?
There are many types of trusts, but all types fall into two main categories:
Revocable Trusts (or “living trusts”)
A revocable trust is, as its name implies, a trust that can be amended, changed, or revoked by the person or people who created it. The grantor (creator) of the trust retains full control over trust assets during their lifetime and can modify the trust in response to changing circumstances. Revocable trusts can be used to protect grantor’s privacy, avoid probate, and shield assets from creditors.
Irrevocable Trusts
Irrevocable trusts can generally not be changed, modified, or revoked. They can be created during a grantor’s lifetime or after their death. Irrevocable trusts can be used to reduce estate tax exposure, exercise control over heirs, and for other more targeted planning purposes including charitable giving, gifting to heirs, or Medicaid planning.
What are the pros and cons of wills versus trusts?
Does a trust or a will last longer?
A will governs how property is distributed after death, but once an estate is closed it ceases to have power over beneficiaries and estate funds.
Trusts can vary greatly in the length of time they govern assets held for the benefit of beneficiaries. A simple trust may distribute assets outright to beneficiaries at a certain age (often somewhere mid-20s to mid-30s) while a Generation Skipping Trust or Dynasty Trust can endure for 100 years or more.
Is a will or a trust more private?
Wills are filed with the court system in the state in which a person died and become a part of the public record.
Individuals and families who are more privacy conscious may choose to use a simple will that “pours over” all assets into a trust. This allows the public record document to be simple and nondescript while the trust, which is not a part of public record, can go into greater detail on the disposition of assets.
Is it easier to create a will or a living trust?
Wills and trust should both be created by a qualified estate planning attorney who takes your wishes and considerations into account. Both documents can be as simple or as complex as you would like them to be.
Wills are always a standalone document, but trusts can be created either as part of a will (“testamentary trusts”) or as standalone documents.
A common example of a testamentary trust is the provision for assets to be held in trust for children if parents die before the children have reached a certain age, often somewhere between 25-35.
Who needs a will and who needs a trust?
At the most basic level, a will should be in place for anyone who:
Wants control over how their assets are distributed after death, rather than letting the state make that decision.
Has minor children who need a guardian appointed in case of their parents death.
The decision to create a trust is based on a greater number of factors. Trusts may be appropriate for individuals and families who have:
Large estates and are looking to save on estate tax.
Minor children or grandchildren who would inherit significant wealth if parents or grandparents pass away.
A desire to exert control over how and when heirs can use and access inherited assets.
An attorney will ask questions about your wishes to determine what estate documents are appropriate for your situation. They will work with you to identify your key concerns and suggest legal structures to meet your goals and give you confidence that your wishes will be carried out after you are gone.
Is it worse to die without a will or die without a trust?
Dying without a will is called dying “intestate.” It means that the state you live in will decide how your assets are distributed to heirs after your death according to laws of “intestate succession.” These laws vary by state, but most commonly reflect this chain:
Spouse
Children (biological and adopted), split equally
Parents
Siblings
Next of kin (extended family, including nieces and nephews, grandparents, and cousins)
If you die without a will, your assets will likely be distributed throughout the probate process. This is the legal process of estate distribution that flows through the judicial system.
If you have a will in place but die without a trust, your assets will be distributed according to the terms of your will. While this doesn’t offer the degree of control a trust would create, it is a valid estate planning strategy for many individuals and families who have smaller estates or a greater degree of trust in their heirs.
What are the tax benefits of a trust versus a will?
Having a will doesn’t generally offer any tax advantages.
Depending on how trusts are structured, they can offer opportunities to reduce an estate’s overall tax liability. Several types of irrevocable trusts may be used to realize tax savings depending on the complexity and size of the estate in question:
Charitable Trusts
CRTs provide income from trust assets to a donor or their beneficiaries for the duration of a trust term. CRT’s dual benefit is that at the end of the term, trust assets pass to a named charitable organization. By contributing appreciated assets to a CRT, an individual or family can receive an immediate charitable deduction while removing those assets from their taxable estate.
Qualified Personal Residence Trusts (QPRT)
QPRTs enable individuals to transfer their primary residence to an irrevocable trust with heirs as trust beneficiaries. The original owner of the home retains their right to live in the property for a set term while paying rent to heirs. After the term expires, the property is transferred to beneficiaries, allowing for a potential savings on estate tax and additional transfer of assets out of the estate via rent payments.
Dynasty Trusts
These trusts are designed to provide for multiple generations and can help assets grow and transfer to heirs while minimizing estate taxes over time. Dynasty trusts are often established in states with favorable trust laws to extend their duration.
Life Insurance Trusts (ILIT)
ILITs hold life insurance policies. By removing the insurance policy from your taxable estate, ILITs can help reduce estate tax liability. The policy's death benefit can then be used to provide liquidity to pay estate taxes or pass on to heirs tax-free.
Grantor Retained Annuity Trusts (GRAT)
GRATs allow individuals to transfer appreciating assets to an irrevocable trust while retaining the right to receive income payments from those assets for a specified period. If assets grow in value more quickly than the IRS’ assumed interest rate, the excess is transferred to beneficiaries free of gift tax.
Let’s take the next step together
Understanding the differences between wills and trusts is not easy. Beneficiaries can encounter a wide variety of different situations requiring knowledge and finesse to manage. If you need more help, you can download The 20 Inheritance Terms you Need to Know, or reach out to Katherine Fox, CFP® and CAP®, a financial planner for inheritors to learn how Sunnybranch can help you understand your inheritance or estate planning picture.
