Trust or Will? Untangling the Differences for a Secure Estate Plan

Key Takeaways

• Whereas a will becomes effective when the person dies, a trust is effective upon the transfer of assets to said trust.

• A trust is a legal arrangement used in estate planning that provides for the transfer of assets from the grantor or owner to a trustee.

• For small estates with simple bequests and easily transferable assets, a will may be the least costly and most efficient option.

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.

What is a Will?

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.

What is a Trust?

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. 

Differences Between Wills and Trusts

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.

Types of Wills

Within the category of wills, it is important to know the types of wills and what their purposes are.

• Last will and testament. This legal document expresses an individual’s final wishes regarding their assets.
• Living will. This is a legal document that delineates the medical care a person would and would not wish to be used to keep the person alive, in addition to preferences for other medical decisions. 
• Holographic will. This is a will that is handwritten, dated, and signed by the testator.
• Nuncupative will. Rather than being written, this type of will is declared verbally by the testator. Such wills are not valid in most states.

Types of Trusts

When planning one’s estate, it is equally important to be aware of the different types of trusts and how they work.

• Revocable living trusts. Grantors can create what are called revocable trusts that they can alter or terminate at any time. The document can also provide for a successor trustee. 
• Testamentary trusts. These are trusts created following the person’s death as directed in the decedent-grantor’s will. They allow a trustee to manage assets on behalf of trust beneficiaries.
• Irrevocable trusts. When they shift them to an irrevocable trust, grantors relinquish their ownership rights to assets. Such trusts are managed by a trustee who is someone other than the grantor. Assets transferred from the grantor to the irrevocable trust may shield the assets from grantor creditors.

Considerations for Using a Will

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.

Considerations for Using a Trust

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.

Addressing Common Questions

Here are a few of the top common questions regarding the use of a trust or will in estate planning, and their answers.

• Do I need a trust if I already have a will, or do they serve the same purpose? For some people, particularly those with means and privacy concerns, a trust and a will can be mutually complementary. Together, they can for example, permit fast transfers, maintain confidentialities, and avoid intestacy regarding estate assets.
• Which is more cost effective to set up and maintain, a trust or a will? For small estates with simple bequests and easily transferable assets, a will may be the least costly and most efficient option. 
• If I set up a trust, do I still need a will to take care of any remaining issues not covered in the trust? A trust without a will can cause issues surrounding assets external to it that could be subject to intestacy legislation. Thus, it may be better if larger and more complicated estates use both legal tools.

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. 

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

Summary

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.