Wills and trusts allow an individual to have a say in how their estate is distributed after they have shuffled off this mortal coil. When someone dies without a will – or intestate – their assets are frozen until a probate court distributes them according to intestacy laws, which vary state to state. This is a time-consuming and exhausting process for family members.
Wills and trusts serve the same ends in estate planning – distribution of assets after death – but they differ significantly in their approach. This article will discuss their characteristics, key differences and how they can work together.
What is a will?
A will is a legal document that goes into effect after the person who wrote and executed it – the testator – dies. It names an executor, whose job it is to carry out the terms of the will.
Wills allow an individual to communicate to the executor:
- How assets are to be distributed among named beneficiaries.
- Guardianships for minor children and pets.
- Instructions for final arrangements, such as funeral arrangements, cremation, etc.
In most states, the “final will and testament” must be signed by the testator – who must be at least 18 years of age and “of sound mind” – and witnessed by two unrelated people. While it’s recommended that wills be prepared by an estate attorney, there are online legal forms that allow people to prepare simple wills on their own.
Don’t confuse “last will and testament” with “living will.” A living will is an advance directive that communicates an individual’s preferences for end-of-life care if they become incapacitated.
Other advance directives, such as medical power of attorney and durable power of attorney, give a spouse or other trusted agent the authority to make medical decisions and take care of financial matters if the individual is unable to.
What is a trust?
A trust is not merely a legal document but a fiduciary relationship in which one party, known as a grantor, gives another party, the trustee, the right to hold title to property or assets for the benefit of a third party, the named beneficiaries. A fiduciary is legally and ethically bound to act in the best interest of others, not themselves.
Trusts provide legal protection for the grantor’s assets, which must be held solely by the grantor and not in joint tenancy. Assets may include real estate, retirement and investment accounts, cars, jewelry and other tangibles. The trust ensures those assets are distributed according to the wishes of the grantor.
Unlike a will, trusts become effective immediately upon being signed during the grantor’s lifetime. The grantor can choose anyone to act as trustee, and it’s critical that a successor trustee be named in case the trustee is unable or unavailable to perform.
A pour-over will usually accompanies a trust. This is a legal document that ensures that any assets acquired after the establishment of the trust will automatically transfer to the trust upon death.
Setting up a trust is a more complex process than writing a will, and thus more costly, but they carry potential benefits:
- They offer greater control over when and how assets are distributed.
- They apply to any individually held assets within the trust.
- They may help avoid estate taxes.
While trusts can be set up in a variety of ways, there are two major categories: revocable and irrevocable. A revocable, or “living,” trust can be changed at any time after it’s established. An irrevocable trust, as the name implies, can be modified only in extraordinary circumstances and with great difficulty.
While revocable trusts offer greater flexibility, the assets are not shielded from creditors the way they are in an irrevocable trust. Someone who is at greater risk for lawsuits, such as a doctor or an attorney, may choose an irrevocable trust to protect the estate from court judgments.
Comparing wills vs. trusts
Wills and trusts both play important roles in estate planning. Let’s compare wills vs. trusts in several key areas.
Does a trust override a will?
The short answer is yes. A will has no authority over a trust’s assets, which may include cash, real estate, cars, jewelry, collectibles and other tangibles, because the assets are held by the trust and not by the individual.
Since revocable and irrevocable trusts take effect immediately, and a will doesn’t take effect until after an individual dies, the trust takes precedence over the will if there are conflicts between the two.
One area in which the will takes precedence is in establishing guardianships for young children and pets and providing instructions for final arrangements. However, a trust can ensure that minor children inherit income only at certain times or provide for the care of a child with special needs. This is one reason many people have both a will and a trust.
Probate is the court-supervised process of administering an estate and transferring property after death according to the terms of a will. Small estates – in Virginia, those valued at less than $50,000 – may take advantage of simple probate procedures. Aside from that exception, all wills are subject to the probate process.
However, probate may not be a huge negative because many types of property pass directly to a named beneficiary. Real estate and financial accounts held jointly with right of survivorship fall into this category, as do life insurance and retirement plan proceeds.
An estate held in a revocable or irrevocable trust does typically bypass the probate process, but avoiding probate isn’t the only reason to establish one. Remember, a trust is in effect during the grantor’s lifetime. Properly prepared and administered, a trust can be a very effective tool in managing assets in the event the grantor is incapacitated.
If staying out of the public eye is an important consideration, trusts have the upper hand. Probated wills are public record. Anyone can show up at the courthouse and view them in their entirety.
Expense and maintenance
Wills are not “one and done.” They should be reviewed and updated every three to five years. This can be done by an individual using online resources but is better handled by an estate attorney.
Trusts involve a good deal more expense. An estate attorney will charge $1,000 or more to build a simple trust, but there can be additional expenses. Property that passes at death through a revocable living trust must be transferred to the trust, administered by a trustee who may or may not charge fees, and then transferred out of the trust to the beneficiaries. There may be other costs, such as real estate transfer taxes or fees. A comparison should be made on a case-by-case basis of the costs between establishing and maintaining a trust and regularly updating wills.
A trust can set up a process for bequeathing a business and ensuring seamless continuation of leadership. It can also plan for how to carry the business forward without the family. If, for example, they’re not interested in taking over the business it can be sold. Making business succession part of a trust prepares everyone for the roles they will play if the principal should die unexpectedly or become incapacitated.
Estates distributed through wills or held in revocable trusts are subject to state and federal estate taxes. For people who die in 2022, the first $12.06 million of an estate is exempt from federal estate tax, so any estate worth less than that would not be impacted. However, both Maryland and the District of Columbia levy estate taxes.
Assets held in an irrevocable trust are not subject to estate tax. Any income generated by the trust is also not taxable. If the goal is to protect generational wealth, an irrevocable trust must be considered.
Why you may need both
Someone who is young, single, childless or broke probably doesn’t need a will. Everyone else does, especially if they have young children. But what life or family circumstances indicate a trust is a good addition?
Contrary to popular belief, trusts are not only in the purview of the wealthy, but given the expense associated with them, there are other considerations. If an individual has:
- net worth of more than $100,000;
- substantial assets in real estate; or
- specific instructions on how and when the estate is to be contributed
Anyone who has a trust also should have a will, at a minimum a pour-over will that assigns remaining assets to the trust.
In addition, while major assets – home, car, etc. – are typically held by the trust, smaller items and keepsakes, like grandma’s diamond ring, wouldn’t be. The disposition of these items should be spelled out in a will. And, as mentioned earlier, if the individual wants to leave instructions for final arrangements or establish guardianships for minor children, a will is a must.
In many respects, trusts and wills accomplish similar objectives. A trust allows the grantor to realize other objectives that a will cannot, but those advantages don’t come without a price. Whether or not a trust is needed in addition to a will depends on an analysis of the size of the estate, family needs, business considerations and many other factors. One size does not fit all.
Estate and tax planning go hand in hand. Each plan should be prepared to best meet the needs of the individual, the business and family members, while the individual is alive and after death. Cope Corrales specializes in estate and tax planning – aligning each client’s personal, financial and family interests. Learn more at copecorrales.com.