Comparing Wills and Trusts: Which Do You Need?

Proper estate planning can be a dreaded task but think of it as a gift to your heirs. Two primary legal entities are used in estate planning: wills and trusts. This summary provides a general comparison. Please consult an estate-planning attorney and financial adviser on your specific situation.

Basics of wills

A will is a legal document that directs how someone wants his or her assets handled upon death and who should be the guardian of minor children or other dependent persons. A will becomes effective when the author of the will, known as the testator, dies.

For a will to be valid, the testator must be an adult of sound mind acting freely and independently. It must be signed by the testator and witnessed by other adults. The number of witnesses varies by state.

If a person dies without a will, he or she is said to die intestate. In that case, a court determines the disposition of the assets and the guardianship of minors under that particular state’s laws.

A will designates a person as executor or executrix of the estate to carry out the terms of the will. The estate enters a legal process called probate in which the assets and guardianships are executed. Probate can be a lengthy and costly process.

Types of wills include:

A simple will, also known as a testamentary will, designates the distribution of assets and guardianship of minors.
The most common example of a joint will is the will of a husband and wife. With this type of will, the spouses designate each other, as the surviving spouse, as full heir.
A pour-over will designates assets that have yet to be titled to a trust to become so upon the person’s death.

Basics of trusts

A trust is both a legal and a fiduciary arrangement for the holding and management of assets of an estate for the benefit of its creator, known as the grantor, and any third parties named by the grantor. It is created while the grantor is still living and assets are placed in the trust. Once assets are placed in the trust, it becomes effective. Assets can include real estate, bank and securities accounts and other valuable assets. The grantor sets requirements for how assets are to be distributed upon their death. The grantor usually designates a person known as a trustee to manage the trust assets if the grantor becomes incapacitated.

Assets that designate beneficiaries, such as IRA and 401K accounts, as well as life insurance payouts, bypass probate and trusts and are independent of them since a beneficiary is named while the owner is still alive. The same applies to financial assets set up as “Joint Tenancy with Right of Survivorship” or JTROS accounts.

A trust cannot designate guardianship, which can only be done with a will. Thus, trusts are often set up in combination with a will.

Types of trusts include:

A living, inter vivos, revocable, or revocable living trust allows the grantor to title assets to the trust and designate a trustee while the grantor is still living. It can be changed and updated throughout the grantor’s lifetime.
A testamentary trust is named in a will and is created upon the testator’s death. It can hold assets payable to the heirs under conditions set by the testator, such as upon children reaching a certain age.
Irrevocable trusts are used to place assets of high-net-worth grantors to avoid estate taxes.
Charitable trusts designate that property in the trust is given to a charitable cause upon the grantor’s death. This fulfills the grantor’s wishes to benefit the cause and avoids taxation of the assets.