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Actions What is the Difference Between a Will and a Living Trust?
Key takeaways
- Trusts let you determine when and how your money will be distributed.
- Wills can be inexpensive and easy to change.
- You can avoid estate taxes with trusts.
We’ve all heard the term “trust fund baby.” For years, trusts were a way for the wealthy to park their assets and ensure family members could live off the distributions for generations to come.
But more recently, trusts have become a tool for anyone who wants to save their heirs’ inheritance from Uncle Sam, or from the heirs themselves. That’s because trusts provide a level of control over your assets that can appeal to everyone, not only the rich.
That said, there are plenty of situations where it makes sense to use a will for your post-life planning. Here’s a look at the advantages trusts and wills can offer.
What is a living trust?
Benefits of having a living trust
A living trust—the term for a trust while you’re still alive—allows you to determine how and when your money will flow to your heirs. This is particularly important if you would like your children or grandchildren to use the money for a specific purpose, such as education.
Say you have an 18-year old child. In a trust, you can determine that upon your death, the child will receive $1,000 each year for educational purposes only. The trustee—the person or entity charged with administering and making decisions in accordance with the trust—will ensure the $1,000 is then used correctly.
By contrast, in a will you can suggest the $1,000 be spent on school. But once the money is in the heir’s hand, they can decide how to use it.
Even so, different kinds of trusts offer different levels of control. In an irrevocable trust, you lose control of the assets entirely to the trustee. Some people choose this because it removes the assets from their larger estate, reducing taxes (read on). In a revocable trust, you keep control of your assets and can make changes as you wish, but you don’t gain those tax advantages while you’re living.
Trust and estate planning
One reason wealthy people use trusts is because of the tax advantages. For example, you can set up an insurance trust: When you die, your life insurance plan will go to the trust, before being divvied out to heirs. This will allow you to determine when your heirs receive the life insurance payments. If it’s a large distribution, you can ensure the tax hit doesn’t all come in one huge lump sum.
However, the IRS has exempted federal tax on estates worth up to $23.16 million for married couples in 2020. If your assets don’t total more than that, your heirs won’t have to pay—no matter when you distribute your assets. (Note that some states levy estate taxes.)
What is a will?
Cost to create a will
Wills are simply easier—and cheaper—to set up. It doesn’t take much more than a small lawyer’s fee to create a will
A trust, on the other hand, will typically run $1,600 to $3,000 Opens in new window for a basic version. It can get much more expensive, depending on the complexity of your assets and plans. (Both wills and trusts can cost less if you’re willing—and able—to create them yourself.)
However, a trust can be much cheaper for your heirs. That’s because, depending on the type of trust, your family often doesn’t have to go to probate court to confirm the validity of your plan, as a will typically requires. Probate court alone can cost 5% to 7% of your estate.
They’re easy to change
To get a will changed, all you need to do is call your lawyer (or, if you’re a DIYer, update your document). You don’t place your assets into a legal entity when you create a will, as you do with a trust.
What you can do next
Trusts and wills both offer ways to ensure your heirs receive their inheritances. Weigh their plusses and minuses to determine which is right for you. Then contact an attorney—or go the DIY route—to put your plans in writing. (Of course, you should consult your tax and legal advisors for advice about your specific circumstances.)
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