Wills and trusts: Key differences and how to set them up
Both wills and trusts help direct what happens to the assets you’ve worked hard to build. But they aren’t the same thing: A will guides the distribution of those assets after your death, while a trust can be opened and administered during your lifetime and continues administering and distributing assets long after you're gone. Learn more about the differences between wills and trusts, when to use each (or a combination of both), and the process used to set them up so you can ensure your estate is managed according to your wishes.
Wills vs. trusts: An overview
Both wills and trusts are legal documents that must be drafted in accordance with state laws.
Wills direct what happens to your property after death and can name a guardian to care for minor children or dependents.
Trusts can be opened while you’re alive and continue after your death, and require a trustee to manage your assets for the beneficiary.
A financial professional can help you select the best estate planning strategy for your needs.
Wills
A will is a legal document that expresses your wishes for what you want to happen to your property, assets, and minor children after your death. Your will needs to adhere to the laws of your state, and it won’t affect certain accounts that have beneficiary designations. For example, if you own a life insurance policy, your will can’t override the beneficiary of that policy (although this is typically not true for other types of financial accounts). You need to change the beneficiary if you want someone else to receive that benefit.
Wills guide the process of probate, which is the legal process of ensuring your estate pays what it owes before changing hands. If you were to die without a will, then your assets would be distributed to others according to the laws in your state, and assets might not go to the people you would have chosen.
Who needs a will?
Every adult who wants control over their assets should have a will, but there are three groups of people for whom it’s especially important:
Married people: You may assume that if you're married and die without a will, your surviving spouse will inherit all of your assets and property, but that's not always the case. For example, in some states, if your spouse is not the parent of your children, they may receive only a portion of your assets, depending on the state and the circumstances.1
People with property: If you own property and die intestate (without a will), then the state decides where your assets go: to your spouse, your children, their descendants, and so on, according to state statutes. If none of these people can be located, the state can claim all your assets and property after any creditors have been paid off. If you want a say in what happens to your property after you die, you need a will.
People with children: If you have children who are below the age of majority in your state (i.e., not adults), you need a will to appoint the guardian of your choice to care for them after your death. You can also appoint the successor to that guardian. Without a will, the state will choose the guardian.
Pros and cons of having a will
A will has many benefits, but there are also some limitations you should know about.
Benefits | Limitations |
|---|---|
A will provides control over the distribution of your assets, even after you’re gone. You can choose who is responsible for carrying out your directives as the “executor” of your will. And you can assign a guardian to care for your children (or even your pets) after your death. | A will is not the final say regarding what happens to your property. There may be other legal considerations that supersede the instructions in your will. Also, remember that a will is a public legal document, so your privacy isn't protected from the curious after you pass away. And even with a will in place, your estate must still pass through probate. Relatives can take legal action if they believe they may be entitled to some portion of your estate, which could draw out the process and delay your intended heirs from receiving their due. |
How to set up a will
The best way to set up a will is by making an appointment with an attorney who will create the document with you as the testator (the person leaving this last will and testament). Before your visit, you should have a general idea of how you want to distribute your assets. Also, try to create a list of all your assets and property, including:
Your home and other real estate
Artworks and collectibles with value
Vehicles
Business ownership and/or partnership share
Bank accounts, retirement accounts, investment accounts
Life insurance policies and annuities
Any other item that has monetary value
The will lists your assets and property and designates the executor. The executor can be a professional, such as your lawyer, but doesn't have to be. In many cases, the executor is a trusted friend or family member, such as a sibling or adult child. If your family members include minor children or dependents, your will needs to name a guardian for them.
Once the will is created, you'll sign it in the presence of witnesses. The requirements for witnesses can vary by state, but generally, they need to be disinterested (meaning they don't benefit from your will), and they need to see you sign the document.
Trusts
A trust is a legally binding document that specifies a trusted third party to manage and distribute your assets to a beneficiary on your behalf. That third party is called a trustee, and they have a fiduciary responsibility to act according to your wishes. Like an executor, the trustee can be a professional or trusted friend or family member. You can have a trust while you’re alive and it can continue after you’re gone, making them a valuable part of your estate plan.
As the grantor (the person granting the right to manage the assets), you'll set up the trust with the help of a lawyer and move your assets into the name of the trust. The trustee does not own the assets; they are only responsible for managing them. The trust will list the assets, name the trustee and beneficiary, and specify the terms, including when and how the assets will be distributed and whether (and under what conditions) the trust will be dissolved. In a revocable living trust, assets can be pulled back, while in an irrevocable trust, they cannot.
Who needs a trust?
Trusts are appropriate in several types of circumstances, in particular:
Larger, more complicated estates: Trusts can provide privacy for people with high net worth or complicated financial situations. They can also provide a way to manage tax liabilities, but you should work with a financial professional to ensure your trust complies with the law.2
Parents with minor children or blended families: Trusts can be a way for parents to gain greater control over how and when their assets are distributed after their death and to provide for their children in their absence. For example, you can distribute assets to children as they reach a certain age or meet a specific condition, like getting accepted into college. Blended families can also use trusts to guide the distribution of assets to the current spouse as well as children from previous marriages.
Families of people with special needs: A special needs trust (SNT) can provide for a family member with special needs while still allowing them to receive the government assistance they are entitled to.3
Pros and cons of having a trust
There are many advantages to using a trust to protect and distribute your assets, but there are some drawbacks to be aware of.
Benefits | Drawbacks |
|---|---|
Using a trust can provide greater privacy than using a will, because the assets don’t go through probate after your death. A trust can also give greater control over how assets are divided. In addition, a trust can be opened and operated while the grantor is still alive, and some types of trusts let you move assets into and out of them as desired. | Trusts have costs associated with their setup and ongoing maintenance, especially if there is a professional or corporate trustee. The administration of a trust can be complex and often requires a financial professional to ensure it complies with state and federal laws, including tax laws. And in some types of trusts, such as an irrevocable trust, once the asset has been placed in the trust the transaction is complete and you cannot title it back into your name. |
How to set up a trust
Note that while some people choose to create a "do-it-yourself" will with the help of an online service, creating a trust is a more complex undertaking that can and should only be carried out with the help of an experienced trust or estate attorney. Before starting, you should have an idea of what you want to achieve with the trust, as well as a comprehensive list of your assets and property. The lawyer will help you determine which type of trust is appropriate and create a document that names you as a grantor, identifies the beneficiary, and assigns a trustee. The trust document will specify the terms of the trust as well as the conditions and instructions and may be accompanied by other estate planning documents. When everything is set up, you transfer the funds or property into the trust. This may involve opening one or more trust bank accounts as well.
Choosing between wills and trusts
If you’re trying to decide whether to create a trust or a will, start an estate planning checklist by asking yourself a few questions.
How big is my estate? Is the estate tax an issue?
Do I need (or will I soon need) someone else to manage my finances?
Do I need or want to protect assets from creditors?
Do I have minor children?
Am I remarried, with children from other marriages?
Do I have reasons to want to avoid probate?
A trust is especially suitable for managing complex or high-net-worth estates and families with unique needs. Smaller estates and simple family structures may need only a will for the estate planning process. You can have both a will and a trust if it suits your situation.