Wills and trusts are both invaluable estate planning documents but they serve very different functions and are used at different times. Used in combination, they can help provide a comprehensive estate plan and both should be addressed when planning for retirement.
A will goes into effect after an individual has died. It delineates the distribution of assets according to the testator’s wishes and typically designates an executor who will ensure that the distribution is correctly made.
Only sole and separate property can be included in a will; property that is jointly held or held in trust cannot be included in a will. Wills can detail items such as the testator’s funeral arrangements, guardianship of minor children, managers for assets belonging to minors, and debt forgiveness; these items cannot be included in a trust.
A will must pass through probate after the testator’s death. This ensures that:
- The will is valid
- The executor has correctly and honestly executed his or her duties
- The terms of the will are satisfied
Some states recognize a holographic will, some don’t, and a will doesn’t have to be notarized in all states. Part of the probate process is determining that the will is valid, particularly if it has been privately kept. Some states allow a will to be filed prior to death but won’t open probate until after the testator has died.
After the will has been probated, it then becomes a matter of public record and can be accessed by anyone. Probate can be expensive and can become a protracted procedure; it isn’t necessary for all estates. Depending on the estate, inheritance taxes can be steep for assets inherited from a will; an estate attorney can provide advice on the best methods to reduce the tax liability from a sizeable estate.
A trust is a legal instrument that enables an entity to hold title to assets that belong to another; title to the assets become the property of the trust. The entity can be an individual, a financial institution, a law firm, or other legal entity and is designated as the trustee for the trust. Some trusts appoint a successor trustee to take over in the event the trustee becomes incapacitated.
A trust has two types of beneficiaries; the primary beneficiaries receive income or benefits during their lifetime, the other receives income or benefits after the death of the first set of beneficiaries.
Unlike a will, a trust becomes effective as soon as it’s created. A trust can be revocable or irrevocable; the type used will depend on the individual estate and circumstances. A revocable trust can be changed until the trustor dies. An irrevocable trust can’t be changed after it’s become finalized, it’s a complex document that needs to be created by an attorney who specializes in them.
Some items that can’t be included in a will can be included in a trust, such as jointly held property and life insurance policies. A trust can provide for physical and/or mental incapacitation or other disability, which can eliminate the need for a court-appointed conservator. A trust is often used as a tax shelter for the beneficiaries, which isn’t possible with a will.
Unlike a will, a trust is a private document, so its contents aren’t available to the general public, either before or after the death of the trustor. Since a trust doesn’t pass through probate, there’s a savings of both time and money.
When planning for retirement, both types of these documents should be included in most estates. Both serve a valuable function and can be most effective when used together.