Estate planners have two major ways to distribute assets after a death: wills and living trusts. If you're thinking about how to distribute your money and property after your death, you need to understand what's the difference between these two legal.
Deciding when you need a trust vs. a will is a basic part of estate planning that determines how and when your heirs will receive your money. When determining which is best for you, it pays to understand the benefits of a living trust vs. a will.
Trust vs. Will
A will is a written document that directs how your assets—money and property—should be distributed after your death. When a person with a will dies, the will goes through a court process called probate, which allows a judge to supervise the distribution and any disputes that might arise.
You can write your own will if you have a fairly simple estate, or you can seek help from an attorney who can prepare one for you and make sure that everything's correct.
A living trust also distributes your assets, but provides some benefits that a will does not. Importantly, your heirs don't go to court when all of your assets are in a trust upon your death.
The trust is yours during your lifetime, and when you die, those assets are passed on automatically to the people you chose. A trustee of your choice, rather than a judge, is in charge.
It's easy to see what the advantages are of a trust vs. a will. Using a trust keeps you out of court, which can be less expensive and faster, and preserves your privacy (if that's a concern). It also allows more flexibility in how the money is paid out.
However, setting up a living trust is more work, because you will need to do lots of paperwork to move assets into the trust.
You should also note that the cost of a living trust vs. a will is higher because a trust is a more complex legal document, and according to trusts and estates attorney Lawrence Friedman, of FriedmanLaw in Bridgewater, New Jersey, administering a trust can be more expensive than administering an estate.
Why Set Up a Trust vs. a Will?
Friedman suggests that people look into trusts only if they truly need more than a will. So who needs a trust vs. a will? First of all, it's possible that you need both.
"Whether or not you have a living trust, you still need a will," says Friedman. "If you have a will, you don't necessarily need a trust."
Attorney Jane Fearn-Zimmer of Flaster Greenberg in Cherry Hill, New Jersey, echoes that advice. A will alone may be appropriate for people with limited assets (she suggests less than $400,000 in total) and no special circumstances. Otherwise, she uses both for many of her clients.
Next, consider your goals. Fearn-Zimmer says one of the benefits of a trust vs. a will is control. A trust gives you the opportunity not just to leave money, but to dole it out over a period of years, delay it until a set date, appoint someone to oversee it on behalf of the beneficiaries and more. That could be helpful if you're leaving money to someone who isn't able to handle it.
"This could be a surviving spouse who is not financially savvy or comfortable making tax elections or financial decisions, or a minor child or even a young adult who you don't entirely trust to manage a great deal of money wisely, " she says.
Another reason why you might use a living trust vs. a will is if leaving money outright to your beneficiary could backfire. For example, if the beneficiary has substantial debts, a trust could protect that money from creditors. A trust could also help a beneficiary who relies on public benefits and could be disqualified from those programs by extra income.
Consider Your Goals
That said, Friedman emphasizes that without this sort of circumstance, there may be no reason you should pay more to set up a living trust. Avoiding probate, he says, is not really necessary in states that have simple probate codes. And in the end, whichever you choose should be guided by your goals and your circumstances.
"Neither a trust nor a will is inherently better than the other," he says. "Which one makes more sense depends on the purpose of the instrument."