The Differences Between Wills and Trusts
Most people are familiar with wills and trusts, but often do not understand the difference between the two. This lack of understanding could lead an individual to choose the option that is not optimal for them.
As you consider whether to set up a will or a trust, here are some important definitions and key considerations to keep in mind.
A will is a document that directs where your assets go when you pass away and who will oversee the process, typically the executor. A will automatically involves a probate court with a judge overseeing everything, including bill payments and the disposition of your assets.
Because of this required stop in probate court, a will is often a slower process than a trust. It can also be more expensive since some attorneys charge for a percentage of the estate. The executor can also charge fees, which may rapidly reduce the size of the estate.
A trust is similar to a will. However, a trust goes into effect while you are living. You appoint a trustee to be in charge, likely you and your spouse while you are living. You are the beneficiaries during your lifetime and will name future beneficiaries for when you pass away.
A big benefit to a trust is the absence of court involvement. Avoiding probate court can speed up the process and reduce fees, as attorneys typically charge only their hourly rate for this work, as opposed to the percentage of the estate that is commonly charged with wills. However, a trust might be more expensive than a will on the front-end because a trust often requires more time and effort to set up.
The two most common trusts are revocable and irrevocable. A revocable trust, as the name implies, can be revoked at any time for any reason. The main purpose of a revocable trust is to avoid probate court. An irrevocable trust cannot be revoked once it exists but can be helpful in certain situations. For example, you can protect your assets to provide for a beneficiary who will need long-term care in the future. Additionally, with an irrevocable life insurance trust you can transfer a life insurance policy to the trust and those death benefits can be used to pay any estate taxes when you pass.
Another advantage of trusts is their privacy. Wills become public documents through the probate court, but trusts remain confidential.
Tax implications are the same for wills and trusts. Both are subject to estate tax, although only the ultra-wealthy need to worry about that. Currently, only estates of more than $24.12 million for married couples, or $12.06 million per person, are subject to the estate tax. The threshold will reduce to $10.98 million for married couples, or $5.49 million per person, in 2026.