Ensuring that your loved ones are taken care of is an important, yet often overlooked aspect, of financial planning. After all, no one wants to think about the worst-case scenario, and it can also be overwhelming to consider all your options for the transfer of wealth, aka estate planning. However, in the unlikely event that something should happen to you, having a will or trust in place can make things infinitely easier for your family.
Wills and trusts are also very different legal agreements, and understanding the difference is key to knowing what’s best for you and your loved ones.
What Is a Will?
Essentially, a will is a written legal document outlining an individual’s wishes for handling affairs and dividing assets after death. In addition to distributing liquid assets—such as cash, bank accounts, and stocks—a will can also appoint guardians of minor children and bequeath items of monetary or sentimental value to the deceased’s recipients. That could include property, vehicles, and family heirlooms. A will can likewise include instructions on how the deceased would like their funeral or memorial held.
The most common type of will is called a testamentary will, which is maintained by a legal executor and becomes active following the death of the individual who drafted it.
However, a will has some drawbacks, particularly if family members or relatives decide to contest it. All wills must go through a legal process called probate, where an authorized court administrator examines them. Probate attorneys can also be quite expensive unless you live in one of the few states that don’t require them—probate laws vary from state to state. In the event a will is contested, the legal process can become drawn out and contentious, creating potential headaches for your family members.
Another thing to be aware of with a will is that your estate becomes public record as it passes through the probate process.
Retirement accounts and life insurance policies are exempt from the probate process, as they pass directly to named beneficiaries.
What Is a Trust?
Trusts are different from wills but come with their own set of pros and cons. Unlike a will, which is active only upon death, most trusts become active the day they are created. And while a will is administered by an executor, a trust is a fiduciary relationship between the trustor (or grantor), the beneficiaries of the trust, and a third-party trustee who oversees the assets.
But perhaps the most significant difference between a trust and a will is that trusts do not have to go through probate court when the grantor dies and likewise cannot be contested—which provides the trustor with better control of their assets.
However, trusts can be expensive and more tedious to set up, and they must also be actively managed. The bulk of the costs with trusts are generally incurred during the initial planning and structuring phase, but they may also be subject to additional administration fees, including title transfer fees, property registration, and compensation to the trustee placed in charge of managing the trust.
Depending on the type of trust you choose, it’s critical to understand whether the value of your estate even warrants the maintenance and expense.
Different Types of Trusts
There are many different types of trusts that can be created for a wide variety of functions. But the two basic types of trusts are revocable, or “living,” trusts, and testamentary, or “will,” trusts. A third category worth mentioning is irrevocable trusts, which are often created for estate tax and asset protection purposes and are significantly more difficult to alter after their creation. Grasping the various distinctions between different types of trusts is critical to evaluating which will work best for your needs.
Revocable or “Living” Trust
Revocable trusts are essentially the opposite of a will in that they are flexible and can be changed, altered, modified, or revoked during the lifetime of the trustor. In the initial stages, the trustor usually serves as the initial trustee and has the ability to add or remove the property from the trust during the course of their lifetime.
As mentioned above, one of the primary benefits of a revocable trust is that the assets are not subject to probate and cannot be contested. However, revocable trusts do not provide asset protection, and they are still subject to any creditors owed money.
Testamentary “Will” Trust
Testamentary trusts are different from revocable trusts in that they are established per instructions left in the trustor’s will and are created by a trustee at the time of the trustor’s death. The trustee is then left in charge of managing the assets on behalf of the beneficiaries. A will can also have more than one testamentary trust built into it.
The main benefit of testamentary trusts over a will is that assets can only be paid out to beneficiaries when certain conditions have been met. For example, this is a common tactic when the trustor wants to ensure that educational expenses have been provided for until the beneficiary reaches the age of 25. Then, the remaining balance of the trust will be paid out when the beneficiary turns 25, or whichever arbitrary age has been decided. However, it’s worth noting that testamentary trusts do not avoid probate, may be subject to being contested in court, and do not provide asset protection.
Irrevocable trusts are a more ironclad form of wealth management. Once assets have been transferred, the grantor no longer owns them and cannot simply remove them from the trust like with a revocable trust. These types of trusts are popular for avoiding substantial estate taxes for large estates, and they also provide strong asset protection from creditors.
Will vs. Trust Comparison
What Is Better for a Physician: A Will or a Trust?
Because both trusts and wills come with their unique benefits and drawbacks, there is really no clear-cut answer to which is better. It varies greatly depending on the individual. The primary benefit of trusts is that they can help streamline the process of distributing assets to beneficiaries while avoiding potentially costly and lengthy probate court battles.
However, if minors are part of the equation, it’s critical to have a will that names a guardian and protects both the children and their inheritance. A testamentary trust may also be essential to ensure that the money is spent accordingly. Wills are also generally easier and less expensive to set up than trusts, which require a facilitator and can quickly accumulate legal and filing fees. But remember, going through probate if you have a will and no trust can still cost thousands of dollars, require months or even years of time, and make your assets publicly known.
There's little doubt that setting up a revocable living trust will cost more than a will, but for a typical physician, it will likely cost less in the end. It also could be done in a DIY fashion using online resources for as little as $100. But it could cost $1,500-$15,000 for an estate planning attorney to ensure it is done correctly.
Wills and trusts are two separate legal documents and how they interact with each other depends on how they are written. However, in the event of conflict between the two, trust provisions will generally outweigh what a will says for the assets in the trust.
Do You Need Both a Trust and a Will?
Deciding between a will or a trust is a personal decision involving many factors. Yet some experts recommend having both, especially when minor beneficiaries need to be looked after. A good rule of thumb is that while everyone should have a will in place, not everyone needs a trust, whether living or irrevocable. But both estate-planning vehicles might make sense for those with substantial property and assets—especially for a high earner, who should form a revocable living trust at some point in their life as part of their estate plan.
Who Needs a Trust?
Because trusts can be complicated and each type comes with advantages and disadvantages, it can be complicated to determine whether you need one for your own estate planning. However, most experts will agree that the most fundamental criteria for needing a trust are if your net worth is at least $100,000; you have substantial assets tied up in real estate; or you have specific instructions on how, when, and to whom you want your assets to be distributed.
Depending on your individual needs, however, there are also dozens of special-use trusts that can be drawn up to meet various estate planning goals, such as charitable giving, provisions for beneficiaries with special needs, bypassing taxes, and more.
With any hope, this crash course in wills and trusts has given you an understanding of what you need to do to provide for your family in the event of your untimely death. It’s not something most people want to think about, but knowing that your loved ones will be protected with a will, a trust, or both should be enough for anyone to rest easy.
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