What is the Difference Between a Will and a Trust?
Wills and trusts are two commonly utilized tools that ensure the proper transfer of assets after death. While both wills and trusts describe how assets are to be distributed, they differ greatly on how the specific distribution is carried out.
How Does a Will Work?
A will is a written document that a person uses to define how their possessions and property will be distributed upon his or her death. This document goes into effect immediately after the individual passes away.
Their accumulated property is known as an estate, and the creator of the will is referred to as the testator. The testator designates, or names, beneficiaries in the will document. A beneficiary is someone or something that will receive a share of the testator's estate upon the testator's death. The testator can name one or multiple beneficiaries. The testator also designates an executor, who is in charge of carrying out the directions of the will.
With a will, the testator can also designate parental guardians for any children they leave behind, outline funeral wishes, and leave instructions regarding how and when their heirs may receive their inheritance.
Can a Will Be Invalid?
In order for a will to be valid, the circumstances surrounding the creation of the document, as well as the document itself, must adhere to certain requirements. Since wills are governed by state law, and these laws vary from state to state, it's important to verify the specific requirements of the state in which the will is to be created. Here are some general requirements that are common for valid will creation:
- The testator must be of majority age, which generally means he or she must be at least 18 years of age
- He or she must have the intent to create a will
- He or she must have the physical and mental capacity to create a will
- The will is typically required to be signed by the testator and a certain number of witnesses
If the testator doesn't follow these standard rules and regulations, their will can be deemed invalid. There are also many other common mistakes that a testator can make that can ultimately invalidate their will. Some of these errors include:
- Creating a handwritten will
- Not destroying previous wills
- Not adhering to state requirements
- Improper witnesses
- Fraud or undue influence
How Does a Trust Work?
A trust is a separate entity whereby a person's real and personal property is held and remains for the benefit of another person. In general, a trust must have a grantor, an identifiable beneficiary and a trustee. The grantor is the person creating the trust. The beneficiaries of the trust are the designated individuals who hold inheritance rights of the trust property. The grantor can name one or multiple beneficiaries. The trustee is the person or organization that manages the trust.
The trustee holds legal title to the trust property and must hold and manage the property for the benefit of the beneficiaries. The grantor can designate one or more trustees. If there is more than one trustee, each is referred to as a co-trustee. The grantor can, and should, also designate an alternative trustee. This person will serve as the trustee if the original trustee cannot or will not perform their obligations.
In order for a trust to be correctly managed, the grantor usually creates a trust document. The trustee is obligated to manage and administer the trust in accordance with the terms of the trust document and law. Trusts are governed by state law, and each state's trust laws vary, so you should check your respective state's requirements.
Types of Trusts
There are many types of trusts, each with their own functions and stipulations. Among these variations, there are two types of living trusts that are most common:
- Revocable living trust: Trust created during an individual's lifetime where one person is assigned responsibility for managing all assets for the benefit of the eventual inheritor.
- Irrevocable living trust: Trusts that cannot be altered, modified or changed after their creation. When the settlor names a trustee to control their property and assets, the decision cannot be taken back.
Do Wills and Trusts Have to Go Through Probate?
Probate is the legal process in which a will's validity or invalidity is determined. If the will is held to be valid, the testator's estate will be distributed according to the directions in the will.
While this may sound simple, probate proceedings tend to be complicated, time-consuming, expensive, and confusing. Probate can take years to complete, depending on factors like estate size, number of heirs, outstanding debts and more. This process becomes even more lengthy when a decedent doesn't have a will, requiring the court to appoint a personal representative to take on the responsibilities of the estate. Heirs cannot receive their share of the inheritance until after the estate is completely settled.
Wills are required to go through probate, whereas living trusts are not. Because the person who creates a trust doesn't technically own property after they've distributed their assets to their trustees, probate is not required to transfer ownership after the settlor passes. On the other hand, wills must go through probate to transfer all property from the decedent's name into the name of a living beneficiary.
Trust vs. Will – Which Is Best When Planning for Inheritance?
Trusts allow for the management and distribution of your assets during life and after death, while a will allows you to appoint guardians, name an executor and specify any final wishes you may have.