Five Major Differences Between These Important Estate Planning Documents

As an estate planning attorney, I have learned that clients are often confused about the difference between trusts and wills. Some common types of trusts, mainly revocable living trusts, are often used as “will substitutes,” designed to accomplish virtually the same goal as a will. However, the two documents should not be confused, as they function in very different manners. In this article, we highlight the five most important differences between wills and trusts.

Please note that the differences highlighted below are intended to serve as general guidelines. The actual specifics are highly dependent on state law and your individual situation. The only way to know whether a trust or will is better for you is to speak with an attorney licensed to practice in the state where you live. That said, I hope this article provides general information that can make the conversation with your attorney easier when you have it.

Difference #1 – Probate

A common goal among my estate planning clients is to avoid probate. If this is your goal as well, it’s important to consider a trust, not just a will. Wills do not help you avoid probate. In fact, probate is generally the process by which your executor will be able to use his or her powers under the will after you have passed away.

This isn’t to say that a trust is the only way to avoid probate, as there are some other methods. But, if you are relying solely on a will, you should expect that your remaining assets will pass through some sort of probate. What impact probate will have on those assets depends heavily on the state you live in, as the probate process varies widely from state to state. Some states have simpler probate processes for the administration of small estates, but what is considered “small” also differs greatly between states.

Difference #2 – Taxes

Another important distinction between the two documents relates to taxes. When you die, there are taxes to be paid at multiple levels, from local probate taxes (which can be avoided entirely if there is no probate) all the way to federal estate tax, and possibly state estate tax as well. Trusts usually allow much simpler tax planning than wills. Because the Federal estate tax exemption has been raised to such a high level, that tax might not be of great concern right now, but there is no guarantee it won’t be lowered again in the future or that your future earnings won’t push you above the threshold.

Difference #3 – Living trust

Another difference between trusts and wills people don’t often consider is that a living trust can be useful while you are alive if you become incapacitated or unable to manage your own finances. If something happens to you while you are still alive, the successor trustee of a living trust can step in and begin managing the trust with a smooth transition of assets upon your death. On the other hand, a will is only effective after you have passed away.

Difference #4 – Titling assets

A downside to using a trust has to do with titling assets. In order for a trust to be effective, it must own assets, which means that after establishing a trust, it is important to retitle all assets and accounts into the trust. This can be a major hassle, and some assets can be difficult or even impossible to transfer. With just a will, assets can stay in your name until you die, at which point it becomes the job of your executor to retitle them to your estate.

Difference #5 – Flexibility

Finally, while this article has focused so far on living trusts, be aware that there are many different types of trusts. A trust can be crafted to fit almost any purpose or goal you might have, such as a special needs trust for a disabled family member. On the other hand, a will is primarily focused on the simple transfer of assets after you pass and is not as easily customizable to your particular situation.

Finally, it’s important to understand the distinction between a living trust and a testamentary trust. A testamentary trust is a trust created by a will. It is not effective until after you have died and your will has been probated (a testamentary trust does not avoid probate). However, it can still be customized like other trusts.

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Jeremy serves as a Wealth Manager, working closely with his clients to create and implement personalized financial plans that address all aspects of a healthy financial life including investments, tax planning, risk management, retirement and employee benefits.

This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.