While you probably know that wills and trusts are both used in estate planning, many people don’t truly understand the difference between the two.
So, what what IS the difference between a will and a trust, anyway?
Both wills and trusts are used to pass your property on to your loved ones after your death. However, trusts allow you to transfer property before your death, while wills do not take effect until after you die.
When most people envision a will, they are thinking about a simple will. A simple will is a legal document that leaves instructions for how your assets should be distributed after your death. If you have any minor children, you can also designate who you would like to be their guardians upon the death of both parents.
The laws about what makes a will valid vary between states. However, all states require five fundamental elements. In order for your simple will to be valid, it must meet the following requirements:
Let’s talk about each one of these requirements individually.
In most states, you need to be at least 18 years old to be able to make a legally binding will. However, some states allow people to create wills at a younger ages, and the majority of states allow some minors to create wills, such as underage members of the military or emancipated minors.
For a will to be valid, you must be of “sound mind” at the time it was created. This means you must understand three essential concepts:
While the first two requirements relate to who can create a will, the final three requirements dictate what the will must contain to be valid. Testamentary intent means that the will must clearly state your desire for that document to be your will. This can be accomplished through a simple statement such as “I declare this to be my last will and testament.”
For your will to be legally valid, you have to voluntarily sign it. Your signature is considered evidence that the will is yours and you have agreed to what it says.
The final requirement is that at least two witnesses sign the will. By signing the will, the witnesses are confirming that you seemed to be of sound mind when you signed the will and that you intended for the document to be your will.
A trust is a legal agreement where one party agrees to hold the legal title to certain property and manage it for the benefit of another. Here are a few terms that will be helpful in understanding how trusts work:
There can be multiple grantors, trustees, and beneficiaries for a trust. Two common types of trusts used in estate planning are living trusts and testamentary trusts.
A living trust is created while the grantor is still alive by transferring property to a trustee. While the grantor is alive, the trust remains revocable, meaning that the grantor is free to alter the trust or revoke it completely. However, once the grantor dies, the trust becomes irrevocable and cannot be changed. Many people use living trusts in their estate planning in order to avoid probate.
A testamentary trust is created by the grantor’s will, which creates the trust and includes instructions for what property should be included, who the trustee should be and who the beneficiaries will be. Testamentary trusts allow grantors to have greater control over how their assets are used after their death.
Let’s get back to the original question. Will versus trust: what are the differences?
Wills always distribute property after your death; living trusts take effect during your lifetime. This means that you can use the trust to distribute property while you are still alive.
While you can leave detailed instructions on how you want to your property to be used in your will, it will be distributed at the time of your death with no real enforcement mechanism in place. In other words, you generally will have to rely on your heirs following your instructions for how to use their inheritance.
A trust, on the other hand, puts a third party of your choosing in control of the property. The trustee can then ensure that the property is being used according to your wishes before it is distributed.
A will distributes all property that is solely in your name at the time of your death. This means that any property you own jointly or that is in a trust will not be disposed of through your will. A trust, on the other hand, only distributes that property that you transferred to it.
After you pass away, a will must go through the probate, which means a court will oversee the process to ensure the will is valid and that the property is distributed according to the will. Conversely, a trust does not go through the probate process, which generally makes the process quicker and cheaper.
Because a will goes through probate in a court, your will and the proceedings will become public record. As a trust passes outside the court system, all of this information will remain private.
If you found this article useful, please check out our asset checklist for estate planning.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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