Wills vs trusts: What’s the difference?
Two tools that can help give you control over the fate of your assets
It may be uncomfortable to think about, but it’s never too early to decide what you’d like to happen to your assets after death — especially if people depend on you for financial support. Wills and trusts are two of the most common tools for long-term estate planning, but they have different operating procedures, limitations and benefits.
The basics of wills
A will is a set of instructions that can be carried out only after its creator dies. The executor of a will is the person tasked with carrying out those instructions.
- In a will, you can detail how you want your financial assets and property to be distributed, whether they go to family members, loved ones or other beneficiaries such as charities.
- You can also use it to establish a trust, which we’ll explain below.
- But wills aren't limited to financial matters. Parents use them to name trusted guardians for their minor children, and some people use them to express funeral and burial preferences.
What happens if someone dies without a will?
Mapping out your preferences gives you more control over how your assets are distributed after your death — and it can save your loved ones time and effort. That’s because if someone dies without a will, a probate court could wind up in charge of deciding how to handle that person’s finances and other affairs. Probate can be a long and sometimes expensive process for heirs, especially if they disagree with the court’s decisions.
When you create a trust, you name someone — a trustee — to oversee and distribute certain assets, either on your behalf or someone else’s. The trustee is legally required to follow whatever conditions you’ve laid out in the trust, while acting in the best interest of your beneficiaries.
In contrast with wills, trusts take effect as soon as they’re signed and funded. And they come in a variety of forms.
- A living trust is one established while the settlor (the person who creates it) is alive. A trustee typically manages it until the settlor’s death, after which the funds are distributed to the beneficiaries.
- Trusts can also be testamentary (meaning they kick in after death), revocable (meaning their terms can be changed) or irrevocable (meaning their terms are fixed).
While trusts can help people with large estates manage their money wisely, they can also be useful for anyone who has a clear preference for how their money should be protected, managed and distributed. Parents can use trusts to ensure their children inherit money upon reaching a certain age, for example, or a child with special needs has financial support even after their parents pass away.
Benefits and limitations of wills
A will can ensure that your estate is handled in a way that feels right to you, and it lets you name guardians for dependents — something a trust can’t do. But wills have some key limitations:
- For example, because wills only take effect after death, a will can’t protect or direct the estate of someone who becomes incapacitated.
- Wills must also be filed with a probate court, which means they’ll become part of that court’s publicly available records and subject to the court’s oversight.
Benefits and limitations of trusts
Trusts can be more complicated and expensive to create than wills. That’s because:
- If you have a specific way you want part or all of your estate to be managed, whether it’s to care for a child or support a charity, a trust can help you see your vision through while offering added legal protection and management.
- Trusts can also guarantee protection for your assets if you become incapacitated.
- And living trusts can bypass probate court, offering more privacy and speeding up the process of distributing your estate to inheritors.
Check out this Personal Capital article to learn more about the benefits, costs and different types of trusts.
Whether you’re leaning toward one or both of these tools, it’s always a good idea to consult a financial professional and an estate attorney. They can help ensure that you’re on the right track.