Living trust vs. will: What’s the difference?

Estate planning can be hard to think about. But knowing about the tools you might have at your disposal can help you figure out where to start.

Wills and trusts are two estate planning tools that help people manage family finances after a death. While wills and trusts share some similarities, they aren’t the same. Here are some things to know about how trusts and wills work and how they differ.

Key takeaways

  • Wills and trusts are both legal documents that are used to distribute someone’s assets after their death. An estate plan might include both a will and a trust. 
  • A living will is another name for an advance directive, which is a legal document that dictates what medical care someone wants to get under certain circumstances. 
  • A living trust is any trust that goes into effect during the grantor’s lifetime. 
  • Wills and trusts have several key differences, including what they cover, whether they have to go through probate court, and what protections and tax benefits they offer.

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What’s a will?

A will, also called a last will and testament, is a legal document that’s a common part of estate planning. Wills dictate things like how someone wants their assets to be distributed after their death, who will become the legal guardian of their children and who will be the executor of their estate. 

A will typically involves three parties:

  • The testator: The person who creates the will. 
  • The executor: The person who administers the testator’s will. The executor is often appointed by the testator of the will. But if the testator doesn’t appoint someone, the executor will be decided in probate court.
  • The beneficiary: The person, people or organization the testator chooses to inherit their assets.

Wills typically have to go through the probate court process, which varies by state. After the testator’s death, the will’s executor has to file the will with the probate court within a certain time frame. Then, the court goes through a process of authenticating the will and giving the executor legal power to carry out the will’s instructions. 

If someone dies and doesn’t have a will, then everything from how their assets are divided to who gets guardianship of their children is left up to a probate court and state laws. 

The probate process can be expensive and lengthy—sometimes taking several years. Plus, probate court records are public. So wills often can’t be kept private. 

But wills are typically much less expensive to create than trusts. And it’s important to remember that you don’t have to choose between a will and a trust. Estate planning often includes a combination of wills, trusts, powers of attorney, medical directives and more. 

What is a living will?

It can be easy to confuse a living will with a last will and testament or a living trust, which is discussed below. But a living will is actually a type of advance directive.

An advance directive, also called an advance medical or health care directive, refers to a legal document that lays out instructions for how someone wants to receive medical care if they can’t communicate their wishes in real time. 

Living wills might include instructions for what kind of treatments and care someone does or doesn’t want under specific conditions. 

What is a trust?

A trust is a legal contract that dictates the ownership, management and transfer of someone’s assets. A trust creates a fiduciary relationship between three parties:

  • The grantor: The creator of the trust and the original owner of the trust’s assets. 
  • The trustee: The person, group of people or institution that has a legal responsibility to manage a trust and always act in the best interests of the beneficiary. 
  • The beneficiary: The person, people or organization that gets the assets from the trust.

There are also two main types of trusts: revocable and irrevocable trusts

  • A revocable trust can easily be changed or revoked by the grantor after the trust is created. 
  • An irrevocable trust generally can’t be easily updated or revoked, except by court order or a legal process called decanting. 

Revocable and irrevocable trusts also have different income and estate tax implications, rules about who can be a trustee, and more. It’s also important to note that revocable trusts automatically become irrevocable trusts once the grantor dies. 

Trusts are much less likely than wills to have to go through the probate court process. That means they might help beneficiaries avoid paying probate fees, make estate settlement quicker and keep family matters private. 

What is a living trust?

A living trust can be any trust—revocable or irrevocable—that goes into effect during the grantor’s lifetime.

What’s the difference between a will and a trust?

Wills and trusts are both legal documents that can be used as a part of estate planning. And they both can dictate how someone’s assets are distributed. But wills and trusts also have some key differences, including:  

  • What they cover: Wills can do things like appoint guardians for minor children, while trusts can’t. 
  • When they become effective: Wills typically only go into effect after the creator’s death. Trusts can manage and distribute assets during the grantor’s life and after their death. 
  • If they go through probate court: Wills generally have to go through the probate court process, which gives people an opportunity to contest the will. Plus, probate court can be a lengthy, expensive process. And it’s public record, so family matters may not be kept private. Trusts, on the other hand, typically don’t have to go through probate court. 
  • Whether they have certain tax benefits or protections: Assets in wills generally aren’t protected from creditor claims. And wills also typically don’t come with the same tax benefits as assets in irrevocable trusts. Assets in irrevocable trusts are typically removed from the grantor’s taxable estate. And they may not be subject to federal and state estate taxes. Plus, irrevocable trusts are protected from creditor claims and legal judgments. 

Living trusts vs. wills in a nutshell

Trust and wills can both be important parts of planning your family’s financial future. And knowing how they work and the potential benefits of each can help you and your loved ones decide what might be right for you.

If you need help figuring out what makes sense, consider talking with a qualified financial planner or advisor who can help you make a plan to reach your specific financial goals.

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