Difference Between a Will and Trust
Have you ever wondered what the difference between a will and trust is? Individuals with significant assets have options to preserve them, for their own benefit and that of heirs. A living trust allows for the use of assets during life and the avoidance of probate after death. A testamentary trust comes into effect upon death and does not avoid probate, but still offers some protection for beneficiaries. Neither type of trust replaces a will, so all legal options should be weighed carefully.
The Difference Between a Will and Trust- Will vs. Trust
What is a Will?
A will is a legal document that establishes who will receive your property after you die. It may also lay out preferred guardians for your children, how your estate’s taxes and debts are to be paid, and names an executor responsible for carrying out your wishes. In California, not all wills must go to probate court. But for those that do, it can take between 9 and 18 months or more to complete the process. During this time, your estate’s assets may be tied up and inaccessible. All the while you are paying court and attorneys fees.
What is a Trust?
A living trust is a document that acts as a form of ownership. Assets placed inside a trust are owned by that trust. Typically, a living trust has a beneficiary who receives income from the trust while he or she is alive. Upon death, what remains of the trust goes to the next set of beneficiaries. Since the assets are owned by the trust and not the deceased person, those assets are not part of the estate and not subject to the probate process. This is the main benefit of having a trust, avoiding probate.
Irrevocable vs. Revocable Living Trust
Depending on individual objectives, a living trust may be irrevocable or revocable. An irrevocable trust cannot be terminated or changed, but its assets are also shielded from creditors. An individual gives away control of their property for the benefit of their beneficiaries. The major benefits of an irrevocable trust are asset protection and tax savings.
Most living trusts are revocable: assets may be added or removed from the trust and the trust may be terminated. Irrevocable trusts have tax advantages that revocable trusts do not. Assets in a revocable trust are not shielded from creditors. Both irrevocable and revocable trusts avoid probate.
A testamentary trust comes into effect upon death and does not avoid probate. However, once the probate process is over, those assets remain in trust. They are managed by an appointed trustee, who has a fiduciary duty to act appropriately for the benefit of beneficiaries according to the terms of the trust. Trustees cannot misuse or mishandle trust assets for their own enrichment.
Difference Between a Will and Trust Chart
|PRIVACY FROM OUTSIDERS||NO||YES|
|TRANSFER ASSETS TO LOVED ONES OUTRIGHT UPON DEATH||YES||YES|
|TRANSFER ASSETS OVER A PERIOD OF TIME||NO||YES|
|COST OF ADMINISTRATION||HIGH||LOW|
|DIFFICULTY TO SET UP||EASY||CAN BE COMPLEX|
|WHEN DOES IT TAKE EFFECT?||ONCE YOU DIE||IMMEDIATELY AFTER THE TRUST IS SIGNED AND FUNDED|
|IS A NOTARY REQUIRED FOR SIGNATURES?||NO (2 witnesses required)||YES|
|ARE YOU REQUIRED TO MOVE PROPERTY TO MAKE IT EFFECTIVE?||NO||YES|
|PROTECTION FROM OBJECTIONS AND COURT CHALLENGES?||NO||YES|
|WILL IT HELP TO AVOID A CONSERVATORSHIP?||NO||YES|
|NAME GUARDIAN FOR CHILDREN UNDER THE AGE OF 18?||YES||NO|
|REDUCE ESTATE TAXES||NO||POSSIBLY|
|LEAVE ASSETS TO A PET||NO||YES|
Four Major Differences Between a Will and Trust
First difference between a will and trust-Trustee Responsibility
Unlike participants in the probate process, which is supervised by a court, trustees receive comparatively little regulatory oversight. Although they hold a great responsibility in law to act in the best interest of beneficiaries, there is a greater risk they will not meet that responsibility. Choosing a trustee, and successor trustees in the event the first trustee cannot serve, is therefore, an important consideration.
In California, it is possible for individuals to establish a trust and name themselves both beneficiary and trustee. In fact, this is a relatively common occurrence, as it affords both use of the assets and control of their management and distribution.
Second difference between a will and trust- Probate Expense
Probate is not only time-consuming but expensive, potentially costing thousands of dollars. You may have to undergo the process more than once if you have foreign or out-of-state property, since assets held outside of California may be subject to another state’s probate proceedings. Individuals with assets in other jurisdictions might, therefore, want to consider placing those holdings into a trust.
However, even in the absence of a trust, many assets are not subject to probate. These include assets with designated beneficiaries and may make up the majority of a person’s wealth. Examples are annuities, life insurance policies, retirement accounts, and many jointly owned assets. Upon filing the appropriate paperwork with the financial institution, bank and investment accounts can also transfer immediately to beneficiaries after death without going through probate.
Therefore, it is not necessarily advantageous for everyone, particularly those with smaller estates, to establish a living trust to bypass probate.
It is important to note that while a living trust avoids probate, it does not necessarily result in a break on income taxes. While it is not necessary to file a separate tax return for a living trust, activity of its assets must be reported on the beneficiary’s return.
Third difference between a will and trust- Privacy
Although a trust is a legal entity, its details are kept private. The contents of a probated will, on the other hand, are a matter of public record. Individuals who value privacy might prefer a trust because it keeps prying eyes away from sensitive details about the existence of certain assets and who benefits from them. In addition, once probate is opened, because it is public record there is a greater chance of creditors making claims against the estate or contesting the proceedings. Placing assets into a trust may serve to avoid some legal and personal arguments that might otherwise erupt upon revelations in a will.
Fourth difference between a Will and Trust-Protection for Dependants
A will allows parents to pass property on to their children, but the influx of money may have unintended consequences. A will transfers all of the assets to the beneficiary at one time. Consider the possible consequences of an 18-year-old receiving a check for $250,000. A disabled adult who receives government assistance may lose eligibility for programs after receiving an inheritance. In order to avoid this, a parent might transfer assets into a trust, naming the child as beneficiary. With the right trustee, this arrangement can ensure protection for an individual who may require lifelong assistance.
Additionally, a parent can have the child’s inheritance pass over a term of years, such as 1/3 of the estate at age 25, 1/3 of the estate at age 30, and 1/3 of the estate at age 35. Prior to the child receiving theses distributions, the trustee may be authorized to help the child pay for education, rent, health care, and overall support. Structuring a trust in this manner helps to prolong the inherited assets and makes it less likely they will be squandered.
Some parents, or grandparents, want to provide financial assistance to loved ones but choose to put conditions on that help. Unlike a will, which results in beneficiaries receiving their proceeds as soon as the legal processes are complete, a trust may have established criteria. For example, funds might be disbursed at different ages, or only upon completion of a college degree.
Regardless of the size of your assets or the complexity of your financial situation, deciding whether to create a trust along with a will is an important decision that should be discussed with an estate planning lawyer. When setting up an estate plan, the difference between a will and trust is a major consideration. Odgers Law Group can offer confidential, informed advice and services to help meet your estate planning objectives.