Trust Versus Will: What’s the Difference and Which One Do You Need

A will outlines how your client's assets will be distributed after their passing, while a trust can manage their assets during their lifetime and beyond. Trusts can help h for themselves and their beneficiaries and prevent court involvement during asset distribution following their death.

Both tools are frequently used in estate planning. By understanding how each works, you can serve your individual clients more holistically. We've put together this guide to help you and your clients navigate the trust vs. will decision and understand how to incorporate trust services into a broader financial plan.

What Is a Trust?

A trust is a legal document in which the grantor (the owner of assets) names a corporate or personal trustee to manage and hold their assets on their behalf. This is done to ensure their wealth is appropriately managed in the interest of themselves and their beneficiaries. A successor trustee can also be named in the trust to assume the primary responsibilities should the trustee become unable to execute management of the trust.

There are two types of trusts: a revocable trust, in which the grantor has the authority to alter or cancel the trust during their lifetime, and an irrevocable trust, where the grantor cannot alter the details of the trust once it's funded and signed.

• A trust differs from a will in several ways:

• Can be implemented during the grantor's lifetime (living trusts), which offers benefits for incapacity planning

• Avoids probate (court involvement during the distribution of assets following death)

• Can help reduce the estate tax burden

• Can protect assets from creditors, lawsuits, and ex-spouses

• Usually overrides a will for titled assets such as real estate, vehicles, or investment holdings

• Protects estate and distribution details from becoming public record

A trust offers more control and privacy during the estate planning process compared to a will. But while trusts can save your clients and their families money long-term, they're typically more expensive and complex to set up initially. It's recommended to seek the counsel of a legal professional or a trust company when implementing one.

What Is a Will?

A will outlines an individual's wishes and establishes how to distribute assets upon their death. The individual typically names a personal representative (executor) to oversee the process. A will can also outline guardianship for minor children and pets and detail other non-asset-related wishes, such as funeral arrangements.

Unlike a trust, a will cannot be implemented prior to one's death. Instead, wills ensure your clients' wishes are appropriately carried out after their passing and clearly define beneficiaries to avoid potential conflict.

A last will and testament differs from a trust in several ways:

• Must go through probate

• Automatically becomes public record

• Can appoint legal guardians for children

• Can't be used for incapacity planning

• Can only be implemented after death

• Covers personal items in addition to titled assets

A will is a powerful tool that helps ensure a recently deceased individual's assets are appropriately distributed. While wills are simpler and less expensive to establish than trusts, they don't offer the privacy or flexibility of an irrevocable or revocable trust.

How Do You Set up a Trust or Will?

Your clients need accurate information, professional financial and legal guidance, compassion, and patience. Let them take all the time they need to consider their wishes for themselves and their loved ones. These are important decisions, so they should never feel rushed when making them.

The process and timing for setting up a trust versus a will are different. Following is a breakdown of the essential steps for setting up each of these legal documents.

For Trusts

Unlike a will, a trust goes into effect the moment your client signs and funds it. The trustee can begin managing their assets while they're still living. Here are the steps for setting up a trust:

1. Choose the type of trust you need (revocable or irrevocable)
2. With the help of a trust company, draft the trust document
3. Identify a trustee to manage assets
4. Transfer assets into the trust
5. Sign the document

For Wills

A will goes into effect only after a person passes away. Before their death, a will has no legal power over their assets. Here's how to set up a will:

1. List your client's assets and identify their beneficiaries
2. Name an executor to carry out their wishes
3. Choose guardians to represent minor children (if applicable)
4. Draft the will
5. Sign the will with witnesses (rules vary depending on state laws)
6. Make sure your clients keep their will in a secure location and tell someone they trust where it's stored and how to access it

Can You Have Both a Trust and a Will?

It is possible (and often recommended) to have both a trust and a will. Trusts and wills can be used together and act as two complementary parts of a comprehensive estate plan for clients with complex financial needs.

A trust addresses financial distribution and management details for beneficiaries. It cannot be used to outline non-material wishes. A will, when used in conjunction with a trust, can act as a "pour-over" document, functioning as a safety net to ensure all financial and personal wishes are carried out appropriately.

Benefits of Having Both a Trust and a Will

There are many advantages to utilizing both of these documents as you and your client plan their estate. When overseen by a qualified financial professional, this approach can be:

• Secure: It can offer greater clarity about your client's estate, further protecting your client's wealth from creditors or ex-spouses who may attempt to falsely claim ownership of certain assets.

• Comprehensive: It allows clients to effectively cover all legal assets, including property and investments, as well as personal items and non-monetary wishes.

• Private: While wills are always a matter of public record, incorporating a trust can allow you to ensure certain elements of your client's estate distribution are private.

• Tailored: It can provide additional control over when and how assets are distributed. For example, a will can establish guardianship of a minor child, while a trust can delay distributions to that minor beneficiary until they are mature.

• Flexible: Clients can modify wills and revocable trusts while still alive, allowing them to make adjustments as their personal and financial circumstances change.

What Happens if a Trust and a Will Contradict Each Other?

If there is a contradiction or inconsistency between an established trust and a will, the trust typically takes precedence over how to handle assets covered in both documents. This is because the assets named in a trust are technically legally owned by the trust itself, rather than the estate of the deceased.

Unfortunately, legal disputes between beneficiaries are common, especially if a will and a trust provide conflicting instructions. This can lead to painful and expensive family conflicts and add to the stress of losing a loved one. Working with a reliable trust company can help reduce the potential for disputes and accusations of influence or fraud.

When Should a Trust and a Will Be Used Together?

A comprehensive approach that establishes both a trust and a will is an effective strategy for most people, as long as the documents are complementary and don't provide contradictory instructions. But it's invaluable for clients with complex financial and personal needs, multiple beneficiaries, or a high net worth.

How to Choose Between a Trust and a Will?

Whether your clients need a trust, a will, or both depends on their circumstances, financial assets, and personal needs. Most importantly, they need to consider their wishes for themselves and their families as they prepare for the future.

When working with clients, rather than simply explaining the practical will versus trust differences and similarities , it can be helpful to work through a series of questions. This helps personalize the decision and reduce the risk that they'll overlook important details.

Net Worth and Asset Complexity

Question: "How high is your net worth? Do you own complex assets such as business interests, multiple properties, or investment accounts?"

If the answer is yes, establishing a trust can give your client more control and flexibility in the process of managing and distributing their assets. Using a trust in complex or high-net-worth situations is especially helpful if your client wants to avoid probate. Business owners often benefit from setting up a dedicated business trust to protect these assets separately.

The Need for Privacy

Question: "Do you want the details of your estate and asset distribution to remain private following your death?"

A will becomes public record as soon as it's submitted to the probate court, which means anyone can request to view or obtain a copy, whether or not they're named as an heir or beneficiary. A trust, on the other hand, keeps your client's affairs confidential. If they want discretion, a trust is usually the right choice.

Minor Children and Guardianship Concerns

Question: "Do you want to name minor children as beneficiaries? Do you need to choose guardians for these children or create a plan to manage their inheritance responsibly until they reach adulthood?"

A will is crucial for appointing legal guardians. Trusts can't do this directly. However, a trust can provide financial support and supervision for minor children, preserving their inheritance and providing for their needs until they reach adulthood. In situations involving children, it's helpful to use a will and a trust in conjunction.

Health Issues and Incapacity Planning

Question: "What do you wish to happen if you become unable to manage your financial affairs or make decisions as a result of injury or illness?"

Wills only come into effect after death. Because they don't include management provisions, wills can't be used to manage a person's assets while they're alive but incapacitated. If your client wishes to plan for their possible incapacitation, they'll need to consider a trust or a power of attorney.

Cost Versus Long-Term Value

Question: "Do you prefer a lower-cost solution for convenience now, or would you rather invest in planning so you can save time, money, and stress for you and your loved ones later?"

A will is less expensive and time-intensive to set up. A trust, however, can help reduce probate costs, limit delays, and minimize the risk of legal complications. If you're looking for short-term simplicity, a will is a great option. But if you want to maximize long-term value, using a trust or a combination of both tools is usually preferable.

Choose What Works for You

Both trusts and wills are essential tools in the estate planning process. Financial advisors and their clients must have a clear and thorough understanding of how these documents work and how to ensure they can be utilized to protect and preserve assets for future beneficiaries.

At Arden Trust Company, we work with individuals and financial professionals to provide comprehensive, individualized trust services. We'll handle the complexities of your client's trust so that you can focus on their overall financial well-being.

Secure your client's long-term estate goals and work with us to offer the tailored solutions they need to preserve their legacy and care for their loved ones.