Get answers to frequently asked questions about the basics of wills and trusts.
Wills and trusts are critical elements of estate planning, allowing you to ensure your money, property and other assets will be distributed as you wish after you’re gone.
But life is busy, and perhaps you haven’t yet taken advantage of these essential tools or recently reviewed your existing estate plan. We will help evaluate your options and determine what makes sense for you, your family and your legacy planning goals.
Here’s an introduction to the basics of trusts and wills and how they may fit into your broader estate planning needs:
In this article:
What is a will?
A will is a legally binding document that provides for the orderly distribution of your assets after your death. A key component of estate planning, a will typically:
- Includes instructions for how and when beneficiaries will receive assets.
- Names an executor to administer your estate.
- Specifies who will care for and/or serve as legal guardian for minor children and dependents (if you have them) if you pass away.
Learn more: Why naming beneficiaries is an essential part of estate planning
What is a trust?
A trust is a legal instrument that allows the person who created it — known as the grantor — to distribute assets to specific beneficiaries. You may place almost any asset into a trust, but they usually include cash, stocks, bonds, real estate, insurance policies and even physical assets such as antiques or artwork.
Trusts are often used by those seeking greater flexibility in overseeing how their assets are managed during their life and after their death. They can also provide strategies for protecting assets from creditors, maximizing gifts, controlling taxes and maintaining privacy.
What is the difference between a will and a trust?
In estate planning, the use of trusts and wills differ in several ways, though they can be used in conjunction with one another. Here are the major differences between the two:
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Estate planning consideration
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Will
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Trust
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Asset distribution
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Allows you to control who will receive assets upon your death
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Provides flexibility for how and when assets will be distributed, during your life and after your death
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Speed
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Requires you to go through probate, a court process that can be slow and costly
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Usually not subject to probate, allowing for assets to be distributed more quickly
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Privacy
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Becomes public record as part of the probate process
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Maintains privacy by avoiding probate
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Expense
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Relatively inexpensive to create
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Involves more out-of-pocket expenses to establish
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Addresses incapacitation?
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Does not provide for the management of assets in the event of incapacitation
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Can include provisions to manage assets in the event of incapacitation
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Learn more: Getting started on estate planning: Key actions to take
What happens if I die without a will?
Dying without a legal will, known as dying intestate, means a probate court in your state will decide how your property will be distributed. In this process your assets are usually allocated to a prescribed, sequential order of recipients beginning with a spouse, then children and further onto closest blood relatives under state law (a legal term known as Per Stirpes). Avoiding intestacy can be particularly important if you’re part of an unmarried couple, as the law could result in assets bypassing your surviving partner, even if that’s not what you intended. In addition, dying intestate can result in more taxes owed, prolong the process and cost more to settle the estate than if you had a will outlining your wishes.
What are the advantages and disadvantages of trusts?
Trusts offer several benefits for estate planning, but there are also some drawbacks
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Advantages
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Disadvantages
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- Avoid the delay and expense of probate.
- Can help in managing estate taxes and protecting assets from potential creditors.
- Provide greater control and flexibility in managing assets during your life and after your death.
- Offer tax-advantaged ways of supporting charities and nonprofits.
- Can help provide medical and financial support in the event you become incapacitated.
- Safeguard assets for your children if you pass away while they are minors.
- Provide the ability to shift a portion of your taxable income to beneficiaries in lower tax brackets.
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- Can be costly and complicated to set up and maintain.
- Don’t always provide income or estate tax benefits or protect your assets from creditors during your lifetime.
- Certain trusts can be inflexible; you can’t change an irrevocable trust once finalized.
- Can be time-consuming to manage due to recording and notice requirements; some trusts need to be updated regularly.
- Can incur higher income taxes; investment assets in some trusts may be taxed at a higher rate than your personal tax rate.
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What are common types of trusts?
One major distinction among all trusts is whether they are revocable or irrevocable.
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Revocable trusts
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Allow you to retain control of the trust’s assets while you’re alive. As a result, the assets in revocable trusts are taxed like any other property you own while you’re still alive. Though revocable trusts typically avoid probate, they are usually subject to estate taxes.
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Irrevocable trusts
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Cannot be altered once they have been established and are typically used to transfer assets out of an estate, often to reduce estate tax liability.
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Revocable living trust
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Allows you to make changes during your lifetime and determines how your assets will be handled after you die.
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Irrevocable life insurance trust (ILIT)
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Establishes an irrevocable trust to hold a life insurance policy outside of grantor’s taxable estate. Upon death of grantor, the trustee distributes proceeds from the death benefit of the policy to designated beneficiaries.
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Charitable lead trust
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Provides a stream of contributions to a qualified nonprofit for a set period while still allowing the underlying assets to be inherited at a future date by another beneficiary (such as a child or grandchild).
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Charitable remainder trust
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Provides a stream of income to the grantor while allowing a chosen nonprofit to receive the underlying asset at some future date (the inverse of a charitable lead trust).
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How do I set up a trust?
You need to work with an estate attorney to establish a trust to ensure it fits your specific estate planning needs and complies with the laws in the state where you live or the state in which you plan to domicile your trust (known as the situs).
As part of the process, you designate beneficiaries of the trust: friends, family members or charities entitled to benefit from its assets. You also name a trustee who will administer the trust.
Learn more: High-net-worth estate planning: When to consider advanced trusts in your plan
Who can be a trustee?
A trustee can be a family member or friend, although many grantors choose to appoint a corporate trustee, such as a bank or trust management company. The trustee(s) you choose will be responsible for overseeing the trust, which may include managing investments, keeping accurate records and preparing and filing annual tax returns. You can outline duties assigned to them within the trust, though state laws may dictate many of their obligations.
Understand your options for trustees
If you name a friend or family member as a trustee, be sure the trust allows them the authority to hire professionals such as an attorney or financial advisor to help manage it. You can also name dual or co-trustees, which involves having a personally appointed trustee serve in combination with a corporate trustee. This allows you to have someone who understands and represents your wishes while benefitting from working with a professional (e.g., filing annual tax returns, investment management, etc.).
Learn more: How to choose an estate planning team: Attorneys, trustees and executors
Take the first step
We will help you understand how these important estate planning tools can work for you, your family and the legacy you want to leave behind.