Introduction
You must have seen or heard the terms "will" and "trust" at some point. It is common knowledge that a Will contains the final wishes of the writer to be carried out upon his death. Depending upon the current need, a person can set up a trust to safeguard his assets. A person can write both a will and a trust deed. In essence, they are legal arrangements concerning asset distribution.
Will and Trust are concepts related to estate planning. They are used to provide instructions concerning the management and distribution of one's assets. The main difference between a will and a trust concerns their execution. A will is effective only after the death of the person who wrote the will. On the other hand, A trust can become effective while the grantor is alive or after his death.
The following article explores both a will and a trust, their purpose, why you need them, and their differences.
Will vs Trust
A will and a trust deal with asset distribution. A Will is a legal document outlining how to distribute one's wealth. In addition, it is useful for appointing legal guardians for one’s children, setting up trusts, and providing instructions concerning one’s funeral arrangements. A will can be revised several times.
A Trust is a legal arrangement for the distribution of certain assets of the owner. It cannot appoint guardians for the owner’s children. It requires the involvement of three individuals, a trust grantor, a trustee, and a beneficiary. A Trust is useful when you require more control over your assets if you have a dependent parent and when you have children from more than one marriage. A Trust is of several types; they are revocable, irrevocable, special purpose, charitable, and special needs trust. Among these types, only the revocable trust can be revised.
Difference Between Will and Trust in Tabular Form
| Parameters of Comparison | Will | Trust |
| What it is | A legal document | A trust deed |
| Specificity | A will concern the execution of all the assets of the owner | A trust instructs the execution of specific assets mentioned in the deed |
| Guardianship | Can assign guardians for their minor children | Cannot appoint guardians for children |
| Execution | After the owner’s death | Both during the owner’s lifetime or after death |
| Probate court | Required | Not required |
| Possibility of revision | Wills are revisable | Except for the revocable trust, no other trust is revisable |
| Tax benefits | None | Irrevocable trusts provide tax benefits |
| Whether they are public or private | A will is made a public record document after the owner’s death | A trust is private |
| Asset protection from creditors | None | Assets allocated to an irrevocable trust have protection against the grantor's creditors. |
What is Will?
A will is prepared during a person's life to help distribute their assets after their death. In simple terms, it is a legal document which tells who the beneficiaries of one’s assets are after the owner’s death. It represents the owner’s final wishes. It can get rewritten and changed several times as the owner wishes, as long as he is of sound mind.
The process of creating a will is a legal activity. The individual writing a will, expressing his final wishes is called a "testator". The testator usually selects a trusted individual to ensure his will gets carried out per his wishes. This person is called the executor. In addition, a Will requires the presence and signature of a witness for it to be legal. It gets filed with a probate court. After the testator's death, the probate court will oversee the execution of the will, ensuring that everything gets executed as mentioned.
One drawback of Will is they offer only limited control over the distribution of the assets. A Will has to go through probate court after the testator's death, where the court goes over the arrangements. Another issue is because of court involvement. Wills can get challenged and changed in court. This results in the testator's intended wishes not getting fulfilled.
Purposes
In addition to dividing your assets among your beneficiaries, a will has several other purposes.
- To appoint a guardian for minor children: If you have young children, a will can specify who you want their guardians to be in the unlikely event of your death. It can instruct an executor to use your assets to create a trust for minors.
- Setting up trusts: A will can have instructions to set up a trust for your beneficiaries. It can also arrange for someone to be the trustee for the safekeeping of the assets until the trust beneficiary comes of legal age.
- Funeral and burial instructions: A will also contain instructions on how you want your funeral and burial to be.
Does everyone require a will?
Sometimes people avoid making wills because of superstitions, believing making a will could accelerate one’s death. Making a will could be uncomfortable for several reasons, but one should never avoid it. An untimely death, and the absence of a Will, could lead to troubles. The local probate court will become responsible for handling the deceased’s assets, properties, etc. In the case of minor children, the courts will decide their guardianship. All these could lead to court battles among relatives, which delays asset distributions.
In most cases, the court will allocate the majority of the assets of the deceased to the surviving spouse. The rest will be equally divided among the surviving children. The surviving spouse can apply for the administrator position, but one can't guarantee the appointment.
If you want to protect the financial security of your spouse or have young children, you must leave a will.
Pros of having a will
- Disinheritance: If you die intestate (passing without having left a will) the distribution of your assets will be left to the probate court. The court will allocate equal proportions to your children or beneficiaries. Having a Will lets you disinherit a child or a spouse if you wish to do so.
- Setting up trusts and other accounts: In case your children are minors at the time of your departure, a will can help set up trusts for them. A trust will hold your assets until your descendants come of age and can legally inherit it. In addition, a Will can help you appoint beneficiaries for your retirement accounts and help set up life-long gifts.
What happens when you don’t leave a will?
- When a person passes intestate, the local probate court becomes in charge of distributing the deceased’s assets. Although in most cases the spouse can apply to be the administrator and is accepted, this is not always the case. In such cases, your surviving spouse will be left without financial protection.
- There are risks for same-sex couples, who are not legally married. When one partner dies intestate, his/her assets will be divided by the probate court. Since they are not married, the surviving partner may not be considered while distributing assets. Hence, for the protection of the surviving partner, it is vital to create a will.
- When a couple or single parent with young children dies intestate, the court will have to decide guardianship of their children.
- In some cases, the relative will engage in court battles for ownership of the deceased’s assets. This can financially bring down your intended heirs.
What is Trust?
A trust is a legal arrangement set up to transfer assets from the grantor to a trustee. The document containing instructions about the trust is called the “trust deed”. The contents of the trust are called “trust property”. The trust property contains instructions regarding its objective, what all assets of the owner are allocated, the legal rights and limitations of the trustee, and the compensation of the trustee for looking after the trust. It also contains instructions on how the owner’s assets are to be divided in cases where there is more than one beneficiary.
A trust involves three people, the trust grantor, the trustee, and the beneficiary. The grantor or trust owner is the person who sets up the trust. It is his assets which are being allocated. A trustee is the person appointed to ensure the assets are properly handled and allocated. He is responsible for looking after the trust until the beneficiary is legally ready to take over. The third person, the beneficiary, is the individual who receives the allocated assets.
Trusts have two variations, depending upon their execution. A living trust is set up by the grantor during his lifetime. Once his children become of age the assets will be transferred to them. A testamentary trust is a trust formed after the death of the grantor. The grantor will have made arrangements for setting up trusts in his will.
Types Trusts
A trust is set up for several reasons, the main reason being tax reduction. Depending upon the reason there are several other variations of trusts. Some of them are as follows,
Revocable Trust
A revocable trust is a trust that can be alerted or terminated by the grantor whenever they want. The grantor himself can appoint himself as the trustee. This is arranged for tax purposes. Since the assets are still in the grantor’s name, the assets mentioned in the trust are included in his taxable estate. A revocable trust also contains instructions for handling the assets after the grantor’s death. The assets passed on through a revocable trust do not require the approval of a probate court.
Irrevocable Trust
An irrevocable trust, as its name suggests, cannot be altered after it is established. The grantors give up their right to the trust and appoint a trustee to manage it. Since the assets will not be under the grantor's control, they will not be included in his taxable estate or income.
Special Purpose Trusts
Special purpose trusts are trusts you set up in addition to the one for your heirs. This trust contains assets that are allocated to charities or other special reasons. Special purpose trusts are created and allocated while the grantor is still alive.
Charitable Trusts
Charitable trusts have two variations. They are as follows,
A charitable lead trust is a trust made to support another person for a certain period. The trust grantor regularly transfers assets in support of the charities. Charitable trusts can be set up and allocated while the grantor is still alive and even after death if so specified in the will. Since these trusts are set up for the benefit of another person, usually unrelated to the grantor, the law allows certain tax benefits.
A charitable remainder trust allocates the grantor's income to himself or his beneficiaries. Other assets are set to be contributed by the grantor to charities. This allocation of assets will take place after the trust expires. This is an irrevocable trust, it cannot be changed. Based on the contributed asset’s value the grantor can benefit from partial tax deduction.
Special Needs Trust
Special needs trusts are set up for providing financial stability to people with disabilities. This trust allows individuals with disabilities, who cannot earn enough for survival. In the United States, individuals with disabilities receive monetary assistance from federal and state public assistance programs. A special needs trust is set up with careful arrangements, so these individuals will not lose their monetary allowance from the state, because they are receiving money from the trust. As such, a special needs trust should meet all the necessary legal requirements before it can be officially set up.
Why you should set up trusts
One misconception about trusts is that only the rich set them. In reality, it doesn’t matter how much money you earned or have saved, trusts are set up to ensure proper care for your loved ones. In the case of an untimely death, one needs to make sure their assets go to their intended beneficiaries. In certain situations in which setting up a trust is greatly beneficial,
- When you require more control: Compared to Wills, Trusts provide more control over one’s assets. You can specify a time when the beneficiary can access the assets in the trust. When writing a Trust, you can provide instructions on how the monetary allowance should be spent.
- For the care of a dependent parent: If you have a parent who is financially dependent on you, you can set up trusts with them as the beneficiary. This will ensure their proper care.
- When you have children from more than one marriage: You can set up trusts for all your children and specify the amounts for each.
- If you are concerned about court involvement: Unlike Wills, a Trust does not have to go through probate court.
- When you own a significant estate: In certain situations, trusts can help with tax benefits, as the assets in the trust are not considered part of your estate.
Main Differences between Will and Trust (in Points)
- A will is a legal document which outlines how to manage the owner’s assets after his death. A trust is a form of legal arrangement in which a grantor transfers assets into a trust for his beneficiary and appoints a trustee to look after it until the beneficiary can legally inherit it.
- A will covers all the assets, properties, and belongings of the testator. A Trust addresses only specific assets.
- A will can get rewritten and changed several times before the owner's death. Trusts cannot get revised except for the revocable Trust.
- A will is effective only after the owner's death. Trust is effective from the moment it gets transferred to a trustee. The trust owner can be living or dead at the time.
- A will has to go through probate court. A trust is not subject to probate.
- After the demise of the testator, the will becomes a public document. Trust is forever a private deed.
Conclusion
In conclusion, a Trust and a Will are actions taken to ensure the proper distribution of one’s wealth. A will has to go through probate court and is at the risk of being challenged. A Trust is not subject to probate court. In the case of young children, a Will can appoint a guardian to look after them. A Trust does not have the option to assign a guardian. You can create a will or a trust or set up both depending on your needs.
