Differences Between a Will and a Trust

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Deciding between a will or a trust can be one of the biggest decisions you make about your estate plan. These are core documents that define who, and how, your estate is distributed. Understanding the differences between a last will and living trust is vital to an effective estate plan.

What is a Will?

A will is more familiar to people. It is a legal document that you sign during your lifetime. You write down who receives what assets.

A Will does not Typically Avoid Probate.

After you've passed then your Executor (called a Personal Representative in Oregon and Washington) petitions the court to be appointed to distribute your assets. Many people believe that a will avoids probate, but it does not! Probate is the public court supervised proceeding that pays your final debts, and distributes your assets. If you own a home, or have assets that do not have a beneficiary designation then your will probably has to go through probate.

What is a Trust?

A trust on the other hand can avoid probate entirely. You create your trust during your lifetime, and you put your assets into the name of the trust. A well drafted trust should name who is charge of your assets if you are ever incapacitated and who is in charge after you've passed (this can be the same people, but it doesn't have to be).

Incapacity Planning

This is one area where wills and trusts differ. A will typically doesn't include any incapacity planning because it is only effective after you are gone. Whereas a Trust is effective during your lifetime. A will relies on a Power of Attorney to manage your things after you are gone. Depending on what state you live in, and the policies of your financial institutions this can mean that your agent under the Power of Attorney is denied access until they get a court order. Whereas a Trust can give your Successor Trustee (the Executor) access to your accounts almost immediately.

Wills v. Trust Checklist: When to Consider a Trust

  • If you have non-joint children then you should consider a trust to ensure that your spouse and your children from prior marriages both receive the inheritance that you want them to receive.
  • If you own real estate, especially if you own real estate in multiple states. If you own property then what is on your deed controls what happens to the house, typically regardless of what your will says. In trust based planning you can put your home into the name of your trust then the terms of the trust controls. This can be especially important if you own multiple properties in multiple states. A probate will be required for each state that you own property. Meaning, if you own your primary home in Oregon, and a rental property in Washington then your executor would need to have a court proceeding in both states to transfer the properties after you are gone.
  • If you have minor children, then you should consider a trust. If a minor child inherits then they may need an additional court proceeding until they are 18 years old. This proceeding would be public, and their inheritance would be overseen by their Guardian/Conservator and a Judge. A trust can allow for private management of a minor's inheritance that is consistent with your wishes. You can also put additional requirements like they can start co-managing their inheritance at 21, then solo manage their inheritance at 25. This reduces the chances that an 18 year old will make poor choices about their new found wealth.
  • If you expect that your beneficiaries will be on needs-based benefits at the time of their inheritance. State insurance, housing, supplemental income, etc are all benefits that can be needs-based. Typically, once someone receives their inheritance then that money will be considered an available resource to the recipient, thus disqualifying them for the benefits they already rely on. This can be particularly problematic when the inheritance is large enough to disqualify the beneficiary from benefits, but not large enough to sustain them for the rest of their lives. They'll have to spend their inheritance then spend months attempting to get back on benefits. A properly drafted trust can prevent this from occurring, and can structure their inheritance so that they can still use their inheritance for things they may need or want but won't prevent them from still accessing important services.
  • If you're concerned about incapacity planning then you should consider a trust. A well drafted trust should include a mechanism to allow loved ones or friends to privately determine when you are no longer able to manage your own affairs. Once you are incapacitated your Successor Trustee can step in and begin paying your bills on your behalf. Improperly drafted trusts might rely on a court order, or a doctor determination. These may require unnecessary time or expense.
  • Your estate is over $1 million in Oregon or $3 million in Washington. Both states have a graduated estate tax that begins at $1 million (OR)or $3 million (WA). This includes life insurance, retirement accounts, real property, bank accounts, and personal property. In some cases, particularly with married couples, a trust can reduce or completely eliminate your tax bill if estate tax provisions are included.
  • If you co-own assets with someone other than a spouse then you should consider a trust to ensure that your intended beneficiaries receive the assets that you want them to receive.
  • If you want to put more structure around how someone inherits then you should also consider a trust. Even with trustworthy competent adults, inheriting through a trust can provide important protections. You can set it up so that in the event of a divorce, lawsuit, or other creditors, your beneficiary's inheritance isn't subject to suit.

The importance of having a good estate planning lawyer to explain your options can not be overstated.

A good lawyer should first listen to your goals, and then be able to explain your options in easy to understand terms. Here at Sunstone Planning LLC we take great pride in simplifying the complicated, and guiding you through making informed choices about your estate plan.

The Pros and Cons of a Trust vs a Will

Will:

PROS-

  1. Usually easier to setup during your lifetime. You create the will and that's it. Sometimes you have to double check beneficiary designations but otherwise your job is done.
  2. Easier to understand. Most people understand what a will does, and the importance of it.

CONS-

  1. Usually does not avoid probate. A court proceeding will likely be required to transfer assets to your intended beneficiaries. Probate can cost 3-5% of your estate.
  2. Creates more work after you are gone, and often more stress and work while you are incapacitated.
  3. Does not provide for incapacity planning.
  4. Less robust tool for structuring how a beneficiary inherits.
  5. More time, money, and energy is spent after you are gone.

Trust:

PROS-

  1. A more robust planning tool for both incapacity and after you are gone.
  2. Avoids probate.
  3. Can provide for a private way to determine if you are incapacitated.
  4. Can include more detailed instructions for how to care for you during your lifetime and after you are gone.
  5. Is a better tool for avoiding accidental disinheritances.
  6. Can reduce estate taxes.

CONS-

  1. Takes a little bit more time, money, and energy to setup during your lifetime.
  2. Can be confusing (at least initially) for your Successor Trustee to learn how to use.