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Estate Planning 101: Will or Trust?

March 29th, 2023 | 3 min. read

By Jacob Schroeder

couple signing will and trust documents

As you moved along your financial journey, you likely built up savings, investments, property and other assets. Now, you may be at the stage where you ask yourself: How can I make sure my estate is efficiently distributed according to my wishes?

Clients of Advance Capital Management have come to expect guidance throughout all stages of their financial lives. That includes answering questions about passing on wealth to the next generation. We understand how important it is to have an estate plan in place. So, what should you consider?

We can tell you the answer, in many cases, is to create either a will or a trust. But, how do you determine which approach is best for you? To help with your decision, let’s explore how each one works and discuss some of their major differences.

This article covers:

  • What is a will?
  • What is a trust?
  • Differences between a will and trust
  • Which is right for you?

What is a will?

A will is a legal document that allows you to make decisions on how your estate will be managed and distributed after your death. It is revocable during your lifetime, which means you can make changes to it at any time when you are alive.

Property that is administrated through a will has to go through probate. Again, probate is the legal process that takes place when someone dies to authenticate the will and distribute the deceased’s property.

What is a trust?

A trust, such as a living trust, is like a substitution for a will that is created while you are alive with instructions on how your assets are to be managed and then distributed upon your death. It designates the following people:

  • Settlor – the creator of the trust.
  • Trustee – the person in charge of the trust assets. The settlor is often named the trustee of the trust.
  • Beneficiaries – the person or people who will benefit at any point in the future from the trust.
  • Successor trustee – the person who will assume the duties of the trustee upon the death or incapacitation of the initial trustee.

It’s important to note that the settlor must transfer assets to the trust, or the trust is useless. The trustee then manages the assets, and the beneficiaries eventually inherit the assets. While the settlor is alive, changes can be made to the trust. The trust, however, becomes irrevocable (changes cannot be made) upon the settlor’s death.

Differences between a will and trust

There are many differences between a will and a trust. Here are some of the most important:

  • A will goes into effect only after you die. A trust, on the other hand, can be used to distribute property before or after you pass away. Trusts often have two groups of beneficiaries: one group to receive income during the life of the settlor, and another group to receive any property left over after the death of the settlor.
  • A will passes through probate upon death of the settlor, which means the courts get involved. A trust passes outside of probate, which can save time and money. Also, because a will passes through probate, it is a public document. Meanwhile, a trust remains private.
  • Only assets in your name are covered in a will. A trust comprises any property that has been transferred to the trust.
  • In general, wills are less expensive to create than trusts. However, there are expenses associated with the probate process.

Which is right for you?

The answer depends on your specific set of circumstances. Generally, a trust requires a bit more effort and expense up front, but it can save time and money upon distribution of the property after you pass away. For some, the best estate plan includes the use of a will AND a trust.

Still, a trust has several advantages. For one, a trust can help protect the inheritance for your loved ones. It’s not subject to creditors. A trust fund can also protect your loved ones against themselves. You can set up a trust that limits how much goes out over time, which can help prevent heirs from spending too quickly. Lastly, you could use a trust as part of an overall estate plan strategy to reduce how much you owe in taxes. As an example, you could transfer assets you think will increase in value to a trust now so that growth isn’t included in your taxable estate later.

The bottom line

In many cases, an Advance Capital Management financial adviser can assist in sorting through the pros and cons of each approach. But, consulting a reputable trust attorney is recommended to determine your final course of action. Keep in mind that the trust attorney is the person who will create your will or trust.

Are you looking to pass on a tax-efficient inheritance to your children or favorite causes? This free guide can help you start building your financial legacy. You’ll learn about 8 common ways to effectively pass on wealth. DOWNLOAD YOUR FREE COPY NOW:

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