Will vs Trust: Similarities, Differences, and FAQ

One of the most common questions asked about estate planning is “What is the difference between a will and a trust?”  There are a few similarities, but a lot of differences also.  In both cases, these documents are a part of your estate plan – to have a complete estate plan, there are also powers of attorney for medical and financial purposes and other documents needed. 

Today, we will cover similarities, differences, and common FAQ.  

Similarities between a will-based plan and a trust-based plan:

Exercising Control: Both a will and a trust allow you to control who gets your assets at your death, how those people/entities get your assets, and who is in charge of making financial decisions at your death.  The levels of control do vary with trusts enabling more control.

Amendments: Both wills and revocable trusts are “set in sand”, meaning you can change them provided you have the mental capacity.  Both documents are “set in stone” upon your incapacity or your death.  

Differences between a will and trust:

Probate Avoidance: A trust will avoid probate if funded properly (again, you have to actually title assets in the name of the trust to make sure this happens).  

A will does NOT avoid probate – it merely tells a probate court where the assets go.  

Now we are going to have a separate blog post on what probate is, but for now, in simple terms, probate is the legal process that your estate goes through after you pass away.  Probate is a state by state process, so this varies depending on where you live.  But probate can be a very costly process.  

For instance, California will charge you a percentage of the assets that go through the probate process.  That can be thousands or tens of thousands of dollars – ouch!  That money goes straight to the government to run this process.

Probate can also be time consuming, and take months or even years to finalize.

Some assets, when they are properly titled, can avoid probate.

Public v. Private: In most states, probate is costly, time intensive, and most documents are public record.  If done properly, trusts will be far easier to administer and can be done privately.  

Control during your Lifetime: A trust allows you to control what happens now, if you become incapacitated, and what happens at your death.  There are multiple types of trust though, and some will give you more ability to change things during your life, while others are more restrictive and once you set everything up and sign it, then you are sort of lock in to those provisions.  We will be discussing different types of trusts later on.  

A will only controls what happens at your death.  So you cannot set out things that you want to happen during your lifetime in a will.  It’ll only make provisions that go into effect at your passing.  

Cost: One of the biggest knocks against trusts is that they are supposedly a lot more expensive to set up than wills.  This is no longer the case if done correctly.  This is why I personally set up my firm to work with a National Estate Planning company that creates my client’s will and trust together, when we create their overall financial plan.  However, even if you never want to work with yours truly, I really don’t think cost should be the reason why you don’t create an estate plan and a will/trust. 

Think about this: the cost that you pay up front (let’s call it $3K to $5K) could be significantly less than what your estate would pay at your passing.

FAQs:

Why do I need a will if I already have a trust?  Assets in your will will have to go through the probate process, whereas if you create a trust and fund it properly, those assets will avoid probate.  

I want to emphasize one point for you here: It’s not enough to just create a trust.  You actually have to put the assets into the trust.  That could include your house, your rental property, really any other possessions or assets.  You have to structure it right so that everything that needs to be is moved over into the trust.

What if I have named beneficiaries?  If you have named beneficiaries on assets (life insurance or retirement accounts for example), the beneficiary designation determines where the money goes, not the Trust or Will!  This is why it is important to make sure your beneficiary designations are in line with your estate plan.  If you name one person in the trust, but the beneficiary designations name someone else, the money from that specific account/policy will go to who is listed as the beneficiary on the account, not the trust beneficiary.

Which one should I do? In most cases, if you are trying to space out distributions for your beneficiary (think minor children), avoid probate, and want to exercise more control, you should consider a trust-based estate plan.  

If all of your assets are passing by beneficiary designation and there is no reason to holds things back from your adult beneficiaries, a will-based estate plan could be sufficient.

As you know, I cannot provide legal advice, and these are important questions.  So I hope that if more questions come up, please contact an estate attorney.  Or, if you have specific questions you think I can handle, I will take your questions and the questions of others and put together a separate episode for us to discuss them.

You can send me your questions at scott@dev-forthrightfinances.pantheonsite.io.