Will vs. Trust: Which is Better?

“By failing to prepare, you are preparing to fail,” said inventor, diplomat and founding father Benjamin Franklin in describing the importance of planning for the future.

It is only natural for people to want to maintain some level of control over the assets that they worked so hard to accumulate throughout their life. Creating a well-structured estate plan is imperative to ensure that a person’s assets are distributed to his or her heirs as wanted and in a timely fashion.

Wills and trusts are some of the most common estate planning tools, but which one is the better way to transfer assets? Even if a person opts to use a trust, they will still need a will. All of their assets might not be transferred to a trust, and there are some estate planning issues that can be handled only through a will, but the bulk of the estate can be transferred through either a will or a trust. Whether an individual wants a will or a trust for their estate is entirely dependent on their own personal circumstances and goals. To discern whether a will or a trust is best, it is important to better understand just how both operate.

What is a Will?

A will is a written and legally enforceable document that states how a person wants personal assets handled and distributed after death. It also can address other matters that aren’t relevant in this discussion.

Wills can accomplish a wide variety of family and financial objectives. A will can enable a person to distribute assets as wanted. Without a will, assets going through probate are distributed as directed in state law. That distribution might not be what the person wanted. Without a will, the probate process typically becomes protracted and expensive, while not always distributing assets as the individual desired.

With a will the testator, as the person signing the will is known, can determine who receives the assets, as well as when they will be distributed. If the will’s owner predetermines that a majority of his or her assets are going to be distributed to the children or grandchildren, the document can be written that way. If the grandchildren are still minors, or if one of the heirs is incapable of managing assets, the owner can restrict access until the recipient is of age or mentally stable.

Creating a will is an important step in estate planning, but it does not come without its downsides. One of the main downsides of creating a will is the lack of privacy. All the contents of a will are public record and make it easy for anyone to find the details. Another major downside of having a will is that all the assets must go through probate court. Probate can take months or much longer and cause an unnecessary number of headaches, along with the thousands of dollars that might need to be paid in attorney fees and other expenses.

“Simply executing a will is rarely sufficient to accomplish all your estate planning goals” said Bob Carlson of RetirementWatch.com. Wills are essential to almost any estate plan, however, relying solely on a will can leave some major gaps in a person’s estate plan.

What is a Trust?

A trust is a fiduciary relationship where a person (known as the trust grantor or creator) gives a third party, the trustee, the authority to hold and manage the grantor’s assets on behalf of the trust’s beneficiaries. In a similar fashion to a will, a trust is designed to give the grantor the ability to designate where the assets will go upon death and provide legal protection. A trust is sometimes called a will substitute.

Trusts take on a variety of different forms with each having a different purpose, but the two most common trusts are living trusts and testamentary trusts. In simplest terms, a living trust is a trust that an individual creates while still alive. Living trusts can be categorized into revocable living trusts and irrevocable living trusts.

Revocable living trusts are trusts that may be changed or altered during the life of the grantor. This means that the grantor effectively still controls the assets. The grantor is usually the initial trustee of a revocable living trust. One of the major benefits of a revocable living trust compared to a will is that the assets in the trust avoid probate. Upon the grantor’s death, the successor trustee takes control of the assets and manages them for or transfers them directly to the trust’s beneficiaries as directed in the trust agreement. Under state law, assets held in a revocable trust avoid probate.

When we’re talking about using either a trust or a will, we’re talking about a revocable living trust. The trust is created and assets are transferred to it during the grantor’s lifetime. The assets in the trust then avoid probate and state laws governing wills and estates. The grantor can change the terms of the trust during his or her lifetime, just as the terms of a will can be changed. Only the assets whose legal ownership has transferred to the trust avoid probate and are governed by the trust agreement.

Irrevocable living trusts cannot be changed or altered once created. Upon the agreement, the grantor transfers all ownership rights of his or her assets to the trust. The main benefit of an irrevocable living trust is the avoidance of creditors and possibly income and estate taxes. Since the assets are no longer under the grantor’s ownership, in most cases the grantor no longer has to pay federal and state taxes on the income and gains generated by the assets.

An irrevocable living trust isn’t a will substitute. The grantor can’t change the trust terms and won’t benefit from the trust assets during his or her lifetime. The grantor has to retain other assets to maintain his or her standard of living.

A trust can be created in a will and is known as a testamentary trust. A testamentary trust takes effect after the death of the person who signed the will (known as the testator). A will can contain more than one testamentary trust and may address either all or a portion of the estate. A testamentary trust is also often used to distribute the proceeds from the payouts of life insurance.

Making an Informed Decision

When estate planning, determining whether to use primarily a will, trust, or both depends on individual circumstances. Each serves different purposes, and there is a lot to consider when forming an estate plan. Establishing a trust has many benefits, but it can be more expensive than a will and requires more work. For example, legal title to assets must be transferred to the trust after it is created. A will may be more appropriate for those who live in a state where probate is not as complex, time consuming, or expensive. Using only a will also can be better for someone with a simple or modest estate and who wants to limit expenses. The “best” option depends on a person’s needs and goals.