Understanding the differences between trusts and wills is crucial for effective, personalized estate planning, yet the terms are often misunderstood or even used interchangeably. Such conflation could lead to time-consuming and possibly costly errors, and unfavorably affect beneficiaries as well. So, trust or will? The following untangles the differences for a secure estate plan.
This is a legal document that, following one’s death, directs the distribution of the deceased’s assets to designated heirs and beneficiaries.
A will can also include instructions for matters that call for decisions following one’s death, perhaps including the naming of the will’s executor, directions for funeral and burial, and the appointment of guardians for minor children.
The document can also direct an executor to establish a trust and name a trustee to possess assets for, say, minor children until they reach a specified age.
A will is required by law to be signed and witnessed and must be filed with the probate court in one’s jurisdiction, where it is publicly available.
Note that if one dies without a will, a condition known as intestate, the probate court will assume estate jurisdiction.
The trust document establishes the terms for trustee asset management, beneficiary distribution, and asset disposition. As a fiduciary, the trustee is obliged to manage the trust assets as set forth by the document.
A trust not only plans for after the person dies, but it is intended to have an impact while the person is still living. For example, it can make one’s wishes regarding assets known, while the person is alive and after they pass, and can establish provisions for things such as mental or physical incapacitation.
Despite some overlap, there are some key differences between wills and trusts, including the fact that, whereas a will becomes effective when the person dies, a trust is effective upon the transfer of assets to said trust.
Also, wills can name guardians for minor children; trusts cannot. Trusts are not under the jurisdiction of probate courts, unlike wills. Further, wills may be revised. Trusts may too, but only if it is a revocable trust.
What is more, a will only covers real estate that is in one’s name when they die. A trust, meanwhile, covers property that has been placed in the trust. And wills are a matter pf public record; trusts are not.
Within the category of wills, it is important to know the types of wills and what their purposes are.
When planning one’s estate, it is equally important to be aware of the different types of trusts and how they work.
A will may be thought of as a relatively simple document that can name guardians for minors and pets, designate where assets go, and largely function as a comprehensive estate planning tool.
Note, though, that wills provide somewhat limited control over asset distribution and are more likely to wind up in probate court.
Key factors to consider when using trusts include that they can ensure privacy for family enterprises and property held through entities not publicly associated with their owners. Note, too, that trusts are often used to transfer assets without the publicity and cost of probate.
Tax-wise, it is important to note that establishing a trust does not protect assets from estate taxation if the estate’s value is more than the federal estate tax exemption, which is $12.92 million this year for an individual decedent.
Trusts, which are generally more complicated than wills, can also involve more substantial costs than does the use of wills. There are legal bills and the cost of shifting property titles to the trust. In addition, there are ongoing expenses for legal compliance and asset management.
Here are a few of the top common questions regarding the use of a trust or will in estate planning, and their answers.
Note that investments are usually put in a trust or transfer-on-death account so that they are passed on to designated beneficiaries. In that case, there is a good chance that such a portfolio will contain a variety of asst classes, since diversified holdings are generally less volatile overall and thus are increasingly popular. Diversification — having positions in other securities in addition to stocks and bonds – has become key to successful investing.
Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.
Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.
In some cases, this risk can be greater than that of traditional investments.
This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million. These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.
However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments.
Knowing how the terms “trust” and “will” differ is an important first step toward creating a secure estate plan for you and your beneficiaries. After all, estate planning, including the transfer of assets including investments, is a subject that nearly everyone needs to address.
Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.