When we think of creating our financial plan, we often think of what we’ll do with our money while we’re alive, including what financial goals we’ll save for. However, many of us neglect to plan for what will happen to our assets after we die.
Of course, no one wants to think about their death. But having an estate plan in place is one of the most important steps of creating a comprehensive financial plan, and it’s a step that many people have neglected to do. In fact, the latest data shows that less than half of Americans have a will in place.
If you’re not sure where to get started with your financial plan, we can help. In this article, you’ll learn the features of both wills and trusts, the differences between them, and how to decide which is right for you.
What is a Will?
A will is a legal document where someone designates how they want their assets to be distributed after they die. Some wills mention certain items that should go to certain beneficiaries, while others simply instruct that their assets should be distributed to a certain beneficiary (or beneficiaries) in full.
In addition to where they’d like their assets to be distributed, someone can also use a will to state how they’d like them distributed. For example, most wills include the designation of an executor or personal representative, who is in charge of carrying out the instructions in the will, as well as settling the decedent’s debts. The executor can be an attorney but is often a trusted friend or family member.
Wills are often written with the help of an attorney and must include a witness’s signature in addition to the signature of the person whose will it is. Wills must often go through a process called probate, which is when the will is authenticated by the court and allows the executor to distribute the assets.
Types of Wills
There are several different types of wills to choose from. The one you choose may depend on your estate planning needs and the state in which you live.
Simple will: This type of will simply states how the person wants their assets distributed when they pass away. It’s the most common type of will, but may not be appropriate for someone with a large or complex estate.
Joint will: Two people can draft a joint will together, which is often the case for spouses. The will usually states what happens after the first person dies (with the assets generally going to the other spouse), and establishes final beneficiaries for after the second spouse dies.
Living will: Often known as an advance directive, this document outlines someone’s wishes while they are still alive but are incapacitated and unable to express them later. A living will can include the designation of a medical power of attorney, as well as instructions for medical care they do or don’t want.
Testamentary trust will: This type of will is more complex and has several layers since it creates a trust for someone’s assets. But unlike other types of trusts, which we’ll discuss later, this one isn’t created until the person dies. Someone might use a testamentary trust will if they have beneficiaries who can’t manage the assets themselves or who will need long-term care.
Pour-over will: This type of will is used in conjunction with a revocable living trust, which we’ll discuss later. With this type of will, all assets pour over into the trust at the time of someone’s death.
Holographic will: Also known as a handwritten will, a holographic will is one that’s generally handwritten and not signed by a witness. These wills are often written in dire circumstances, such as on someone’s unplanned deathbed. They aren’t legally binding in all states, but can still give some guidance to loved ones.
Nuncupative will: This type of will is even less formal than a holographic one since it’s spoken out loud. Like a holographic will, the nuncupative will is one that someone might use on their deathbed. These wills are often not legally binding, but as a last resort, can provide some guidance to loved ones.
Advantages and Disadvantages of a Will
Wills have plenty of advantages, which is perhaps why they’re the most common estate planning tool. First, wills are simple and affordable to create. Some people choose to create their own will and have it signed by a witness, but even hiring an attorney to create a will is relatively affordable.
Despite their simplicity, wills also allow most people to accomplish all of their estate planning needs. You can designate your beneficiaries, name an estate executor, and choose a guardian for your children, if relevant.
Because of how simple wills are, they are also flexible. Someone can amend or revoke their will at any time to draft one that better suits their situation.
That being said, wills also have some disadvantages. First, most wills are required to go through the probate process. This process can be lengthy. It can last more than a year for large estates and several months for even small and simple estates. Not only does the probate process hold up the distribution of the assets, but it also makes the estate a matter of public record. And this process could result in another family member challenging the will in court.
What is a Trust?
A trust is a legal arrangement for someone’s assets. Like a will, it can ensure someone’s assets are distributed to their designated beneficiaries. But instead of being a legal document, a trust is a type of structure that can hold some or all of someone’s assets.
Trusts generally have three parties: grantor, trustee, and beneficiary. The grantor is the person who transfers their assets into the trust. The trustee is the person who holds and manages the assets within the trust. Finally, the beneficiary is the person who will ultimately receive the assets within the trust. Depending on the type of trust, the trustee could also be either the grantor or the beneficiary.
Like a will, creating a trust can ensure that someone’s assets are distributed how they wish after they die. However, they provide additional protection as well, including more legal certainty and the ability to reduce estate taxes.
Types of Trusts
Trusts can be a bit complicated, partially because there are so many types to choose from, each of which is most appropriate for certain people. Below we’ll break down some of the different categories of trusts to help you understand their features and how they work.
Living vs. testamentary trust
Each trust is considered either a living trust (also known as an inter-vivos trust) or a testamentary trust. A living trust is created and active during the grantor’s lifetime, while a testamentary trust is created by someone’s will after their death.
Revocable vs. irrevocable trust
A revocable trust is one that can be changed by the grantor during their lifetime. The person who creates the trust can change a trust’s contents or beneficiaries, and even revoke the trust altogether.
On the other hand, an irrevocable trust can’t be changed once it’s been created, and assets that have been transferred into it can’t be removed. Because the assets in an irrevocable trust are no longer the grantor’s once they enter the trust, this type of trust can help families avoid estate taxes, while revocable trusts can’t.
All trusts are either living or testamentary and either revocable or irrevocable. Both revocable and irrevocable trusts can be living trusts, but all testamentary trusts are irrevocable by nature.
In addition to those primary categories of trusts, there are also plenty of other types. Other types of trusts include generation-skipping trusts, charitable trusts, family trusts, life insurance trusts, special needs trusts, and more. Each of these types of trust is designed to address a specific family or financial need.
Advantages and Disadvantages of a Trust
One of the key advantages of a trust over a will is the ability to avoid probate. Assets held in a trust bypass probate and go directly to the beneficiaries, which makes the process after someone dies go more smoothly.
Trusts also have a degree of flexibility, especially since there are many types to choose from. It’s easy for everyone to find a trust that works best for them based on their estate planning goals and financial situation. Someone who wants control over their assets until death can choose a revocable trust, while someone who wants to avoid estate taxes could choose an irrevocable trust.
That being said, trusts also have some disadvantages. They are more complex to create than wills, meaning they are also more expensive. They may also require ongoing administrative costs that aren’t required for a will.
There are also disadvantages for certain types of trusts. For example, grantors usually have to choose between the flexibility of a revocable trust and the tax advantages of an irrevocable trust. And for those that choose the irrevocable trust, no changes can be made later on in regards to the beneficiaries or assets.
Trust vs. Will: Key Differences
There are some key differences between wills and trusts. Your specific needs will help you determine which option is right for you.
Will
Trust
Effective date
At the time of death
At the time of funding
Cost to set up
$1 – $1,000
$1,500 or more
Complexity
Simple to set up
Complex to set up
Contestability
Can be challenged in court
Difficult to challenge in court
Tax benefits
None
Estate tax benefits for irrevocable trusts
Requires probate?
Yes
No
Protection from creditors?
No
Yes
Name beneficiaries for property?
Yes
Yes
Name guardians for children?
Yes
No
Flexibility?
Yes
For revocable trusts, yes
Maintains privacy after death?
No
Yes
Avoid conservatorship?
No
Yes
Effective date
A will can be drafted at any time, but it doesn’t come into play until someone dies. The only exception is a living will, which addresses someone’s medical directives, but doesn’t designate how their assets will be distributed when they die.
On the other hand, a living trust is active as soon as it’s been legally created and funded. Grantors can add assets at any time, and depending on the type of trust, may also be able to remove assets. Trusts can also provide other benefits during someone’s lifetime, including protection during incapacitation.
Probate and privacy
Contrary to popular belief, a will doesn’t help someone to avoid probate. Unless all assets have beneficiaries listed on them, they must go through the probate court process, which can be costly and take months, or even years. Another downside of probate is it’s a part of public record, meaning there’s little privacy. Anyone who chooses to access those public records will have information about a decedent’s assets, which can lead to court challenges and other problems.
A trust, on the other hand, allows someone to avoid probate. Not only can beneficiaries receive assets more quickly, but there’s also an added layer of privacy. As a result, a trust might be a more attractive option if you fear your final wishes will be challenged.
Complexity and cost
As we mentioned, wills are simple and affordable to create. Someone could write their own will, as long as they have it notarized. There are also online services that can create your will for a small cost. Even hiring an estate planning attorney to draft a will is quite affordable. Once the will has been created, there’s no ongoing cost of effort required unless you need to make changes to it.
A trust, on the other hand, is far more complex, and therefore, more expensive to create. You’ll generally have to hire a professional to create a trust for you, and possibly to manage it on your behalf. There are also more legal and tax considerations on the front end when setting up a trust, which can further complicate the process.
Taxes
One of the key differences between a will and a trust are their tax consequences. Wills provide no tax benefits for the decedent or the beneficiaries. All assets that are distributed through a will are subject to estate and/or inheritance taxes.
Note: Most families don’t have to worry about the estate tax, which is why wills are still an appropriate choice for so many people. Estate taxes apply only to estates larger than $12.06 million in 2022.
On the other hand, it can provide some major tax benefits. When assets are added to an irrevocable trust, they no longer belong to the grantor, and therefore, are no longer a part of their estate. As a result, those assets aren’t subject to estate taxes when the person dies. For this reason, irrevocable trusts are a popular choice for high-net-worth individuals.
Flexibility
Both wills and trusts can provide a layer of flexibility, depending on the type you choose. In the case of a will, the writer can revoke the will at any time or amend it throughout their lives. For example, a young single person might have a will that leaves all of their assets to their parents. But as they grow their family, it makes sense to change their will to leave their assets to a spouse or children.
A revocable trust can also create plenty of flexibility. The assets within a revocable trust still belong to the grantor, meaning they can withdraw assets at any time, change the beneficiaries, or even revoke the trust altogether.
While both wills and revocable trusts provide flexibility, irrevocable trusts don’t. If you want the opportunity to make changes to your estate plan throughout your life, an irrevocable trust may not be right for you.
What Makes Sense For You?
Whether a will or trust is right for you depends largely on your financial situation. A will can be a great option if you have a relatively small estate. It can also be the right choice if all of your assets have beneficiaries already listed on them since those assets will avoid probate anyways. For example, you won’t have to worry about probate if you have a joint owner listed on your home or beneficiaries listed on your investment and bank accounts.
You’ll also need a will if you have minor children. A will — not a trust — allows you to designate a guardian for your children.
On the other hand, a trust is probably a better option if you have a large or complex estate. A trust will help your loved ones avoid the probate process after you die. Not only does this save them time and money, but it also creates a layer of privacy for them, since trusts aren’t a part of the public record like probate estates are.
A trust is also the right choice if you have an estate large enough to be subject to the estate tax. In that case, it probably makes sense to set up an irrevocable trust for at least some of your assets to help your loved ones reduce or avoid estate taxes.
Can You Have Both?
The good news is you don’t have to choose between a will and a trust — you can have both. In fact, most people who use a trust should still have a will to make their wishes known to loved ones. In fact, having only a trust without a will could create problems for your estate, especially if there are any assets outside of your will or you have other legal matters to clear up, such as guardianship of your children.
So rather than asking whether you should use a will or a trust, ask yourself whether you need a trust in addition to your will. The section above can help you do just that.
Tips and Considerations When Estate Planning
There’s more that goes into estate planning than choosing between a will and a trust. You’ll also want to consider legal documents that can protect you while you’re still alive, but might be in your final years. For example, a medical power of attorney and living will can help ensure your wishes are followed as far as the type of healthcare you’re okay with. Meanwhile, a financial power of attorney can designate someone to handle your finances if the time comes that you can’t.
Another important estate planning consideration is how your assets are titled. As we’ve alluded to, the estate distribution process after your death is simpler if your assets have beneficiaries listed directly on them, since they can pass to your loved ones without going through probate. Similarly, titling your assets in a certain way — such as joint tenants with right of survivorship (JTWROS) allows them to pass directly to another individual.
Next Steps For You
Estate planning can be a complex process that, in many cases, shouldn’t be done alone. Consider hiring an estate planning attorney, even if only for a consultation, to help you determine what steps to take and whether a will and/or trust are necessary.
A financial planner can also help you with estate planning, especially when it comes to reducing estate taxes and creating generational wealth for your loved ones. Check out Personal Capital’s wealth management services to connect with a fiduciary financial planner and get started on creating your comprehensive financial plan.
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Author is not a client of Personal Capital Advisors Corporation and is compensated as a freelance writer.
The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. Compensation not to exceed $500. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money. Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.
