Breaking Down the Differences Between Trusts and Wills

Trusts and wills are two of the most common ways to make sure your estate gets passed on according to your wishes. They're both types of legal documents that specify who inherits your money and other property once you're gone.

The basics of trusts and wills

The differences between trusts and wills have to do with their distinct legal status.

A will is a simple legal document detailing instructions for what happens after you die. You list all your property and state who should inherit what. When the time comes, the courts will read through your will in public through a process called probate and pass along your estate according to the instructions.

A trust is a standalone legal entity for transferring property. You first put your assets into the trust—this may take effect either before or after your passing, depending on the type of trust. The trust will then distribute the property according to your instructions. For example, you might stipulate that your children will receive 10% of the account funds each year. A financial professional, called a trustee, would manage the assets on behalf of your heirs to make sure the trust follows your instructions.

One of the key benefits of trusts is that they they aren't announced in public during probate, so they're more private. A court doesn't have to oversee the transfer or announce your plan like they do with a will.

Setting up a will

You can hire a lawyer to handle your will, or you can write one yourself. There are pre-written templates online that you can easily fill out. For the will to be legally binding, you need to date and sign it in front of at least two witnesses, who also need to sign a document stating they've witnessed your signature of the will.

Keep in mind that other legal instructions can take precedence over what you include in your will. For example, if you name a beneficiary on a life insurance policy or retirement plan, that person will receive the account payout even if your will says differently.

Also, state laws protect spousal inheritance rights. For example, in a community property state like California, your spouse will inherit half your property earned during the marriage. Check the laws in your specific state as you plan your will.

Establishing a trust

You typically need to hire an estate or trust attorney to file the appropriate legal documents and launch a trust. The cost and what you'll need to do next depend on the type of trust you choose. A few of the more common types include:

• Revocable trust: This type of trust lets you change the instructions while you're alive. You can pick different heirs, move property in and out of the fund, and even cancel it altogether.
• Irrevocable trust: Once you put property into this account, you can no longer take it back out. This approach may help your heirs reduce inheritance taxes.
• Living trust: This is a trust you set up while you're alive, versus a testamentary trust, which is created after your death using your will.
• Charitable trust: If you want to donate to charity as part of your legacy, you can set up a charitable trust.

Deciding if you need a trust

A will is a good document for nearly everyone to have. It's easy and potentially free to set up. It also lets you leave instructions beyond just what happens to your property—for example, if you have specific burial wishes or want to name a guardian for children if they're still minors.

The real question is whether you should use a trust as well. Setting up even a basic trust means paying a lawyer and figuring out how and when you'll transfer assets to the fund.

Generally, the more money or property you have, the more it may make sense to use a trust. Trusts often help reduce inheritance taxes. In addition, you might want that extra privacy in passing along your larger estate without going through probate.

If you have young children, a trust can help protect their inheritance. For example, while your kids are growing up, you might choose to leave instructions that the trust only gives them or their guardian a small annual payout. Then, once your children become adults, they could inherit the full amount.

Whatever you choose, consider meeting with a legal or financial professional to make sure you've set up your estate plan properly. That way, you can rest easy knowing you've done your best to address any legal issues in advance for your loved ones.