Estate planning refers to the process of handling, preserving, and distributing an individual's finances and assets if they suffer a major illness or after they die. Estate planning can come in many shapes and forms. But the right one depends on the individual's preferences and personal situation.
This can come in the form of a will or a trust. A will and a trust are separate legal documents that typically share a common goal of facilitating a unified estate plan. These two items ideally work in tandem because they are separate documents. But they sometimes run in conflict with one another—either accidentally or intentionally. In this article, we look at the difference between these two documents to help you decide which may be right for you.
- Wills and living trusts are part of a comprehensive estate plan.
- A revocable trust is a living trust set up and funded by an individual who gives the trustee the responsibility of managing and distributing the assets for the benefit of the named beneficiaries.
- A will is a document that highlights the wishes of an individual after they die.
- Wills have no power to decide who receives a living trust's assets, such as cash, equities, bonds, real estate, and jewelry.
- Individuals who have trusts should also have wills as trusts only provide details on what to do with named assets.
Revocable Trust vs. a Will
Revocable trusts and wills are estate planning tools that individuals establish during their lifetime. They are designed to manage their assets, whether that's money, real estate, artwork, or other valuables. They may be used for the same purpose in that they are set up to transfer assets to an individual's heirs. But there are some inherent differences between the two.
A revocable trust is a type of living trust set up when someone is still alive. It gives the trustee immediate responsibility for managing the grantor's assets for the benefit of the heir or beneficiary. This means the trust goes into effect once it's signed. Unlike other living trusts, a revocable trust can be altered or canceled by the grantor at any time. Once the grantor dies, this trust becomes irrevocable. At that time, the trustee is required to manage and/or distribute the assets as per the grantor's wishes.
Wills, on the other hand, are legally enforceable documents that provide directions on how individual wishes to distribute their wealth and assets among their named heirs only after they die. Wills may also name guardians for any minor children. Like trusts, wills can also be changed at any given time by the individual.
But which one holds greater legal value? Since revocable trusts become operative before an individual's will takes effect at death, the trust takes precedence over the will. This is especially helpful when there are discrepancies between the two.
Intestate is the term used to describe the situation when someone dies without leaving a will. In this case, a deceased individual's assets are turned over to a probate court, which determines how they are distributed.
A Trust Is a Separate Entity
When a person dies, their will takes effect in a legal proceeding called probate, which aims to distribute the deceased individual's property, according to the terms dictated by their will. Probate can be a long and costly process that determines whether a will is valid.
The same isn't true for trusts, which is one of the key benefits of a revocable trust. A trust is considered a separate legal entity for the purpose of managing and distributing assets as per the grantor's wishes.
The assets named in a revocable trust do not pass through the probate process along with their personal assets. That's because assets named in a trust aren't legally owned by the deceased person. In other words, the will has no authority over a trust's assets, which may include cash, equities, bonds, real estate, automobiles, jewelry, artwork, and other tangible items.
If you're going to have a trust, make sure you fund it. It won't be worth anything if you don't transfer any assets into it.
Do You Need Both a Will and a Trust?
Now that you know the difference between a revocable trust and a will, you probably want to know whether you can have them both. Since they are two separate entities, you can have a will and a trust. But the big question remains: Should you have both?
Most people think that because they have a trust, they don't need to write a will. That's not true. If you do establish a living trust of any kind, including a revocable trust, you should also have a will. Trusts only contain the assets that you transfer over to be handled by the trustee. Having said that. they don't actually include all of your assets.
Wills can also take care of issues that your trust can't—notably, guardianship of your minor children and instructions about what happens to your pets you may have. other directives once you die. You can also outline other directives, such as funeral arrangements, to take place after you die.
Revocable Trust vs. Will Example
Let's assume a patriarch named Calvin has two children named Donna and Maxine. Calvin decides to place his home into a living trust which states that both his kids are to inherit that house. Several years later, Calvin remarries.
But just before he dies, he executes a new will that purports to leave the property to his new wife, Paula. In this scenario, Calvin would have needed to amend the trust, in order to make the transfer to his wife effective. Consequently, that home becomes the property of Donna and Maxine.
This can be a confusing subject to many individuals who write wills and expect the stipulations to be carried out without incident. Therefore, it's vital to remember that a revocable trust is a separate entity and does not follow the provisions of an individual's will, upon their death. It's prudent to seek the advice of a trust and estate planning attorney, to make sure proceedings go as planned.
What Is the Difference Between a Will and a Trust?
A will is a legal document that is enforceable after an individual dies. This person includes directives on how assets and other personal effects are to be distributed. Wills also include other instructions, such as what to do with minor children and pets. Trusts, on the other hand, are legal entities that must be funded by the grantor. A trustee has the responsibility of handling, managing, and distributing assets within the trust even while the grantor is alive. A revocable trust can be changed or canceled only when the grantor is alive but becomes irrevocable after their death.
Does a Will Supersede a Trust?
Once the grantor funds the trust, it cannot be vacated by anyone. This includes the grantor. This means that a will cannot supersede a trust after the grantor dies.
What Supercedes a Will?
There is a document called a codicil that often trumps a will. A codicil is often supplementary to a will and is commonly used to amend and/or replace the original will drafted by an individual. In other cases, it may serve as an alternative to a will.
What's Better: A Trust or a Will?
Wills often have to go through the probate process, which can be often be long and costly. One way to avoid this is to set up a trust. Keep in mind, though, that trusts don't often include all of your assets, especially if you acquire things after it is set up. You can set up directives for things like the guardianship of your minor children and pets by drafting up a will. Although it's always a good idea to have a will, you may want to consider having a trust as well.
The Bottom Line
People often believe that trusts are only for the ultra-rich. But that isn't necessarily true. In fact, they can be very useful estate planning tools for anyone. If you're considering establishing a trust (perhaps for your children or your grandchildren), make sure you also draft up a will. While the trust will only take care of the assets with which you fund it, your will should be more comprehensive by providing details on how all of your other assets should be dealt with after you die. When all else fails, make sure you consult an estate planning professional to weigh out your options.