Let us have a glance at the difference between the two in brief below:
Table of Contents
Difference Between Will And Trust
The primary difference between a will and a trust lies in the nature of the contract with respect to the complexities involved and implementation terms. A will is a simple legal document concerning the transfer of assets from owner to inheritor after the former’s death. On the contrary, a trust is a complex legal agreement that involves the transfer of assets and funds of owners to another party, either after the former’s death or even when they are still alive.
Key Takeaways
- A will or last testament is a legal document outlining property and asset distribution after the grantor's death.
- It requires the presence of witnesses and their signatures for the contract to have legal validity in a court of law.
- A trust is also a legal contract concerning the transfer of ownership of properties to a trustee, who manages assets on behalf of the beneficiaries, per the state laws.
- A will transfers property or assets after the grantor's death while trust becomes effective during their lifetime, bypassing probate and offering greater control over benefits despite being difficult to set.
Comparative Table
| Particulars | Will | Trust |
|---|---|---|
| 1. Purpose | Purpose Family members can easily settle the property distribution after one’s death. It helps in asset distribution and management of assets during the lifetime and after the death of the owner. | It helps in asset distribution and management of assets during the lifetime and after the death of the owner. |
| 2. Suitable for | Those with dependents and children who need to be secured after owner’s death | Usually, those who want the beneficiaries or the person of their choice to receive assets and funds while they are alive. |
| 3. Cost | Can be made free of cost. If priced, the cost is determined based on the size and complexity of the estate. | It is expensive to set up and maintain. The cost may range between $160 and over $3,000. |
| 4. Simplicity | One can do it on their own. | It always needs legal professionals to form an agreement. |
| 5. Modification | Changes can be made to it easily | It cannot be changed once the trust has come into existence. |
| 6. Legal implications | After one's death, long probate court proceedings may happen in the event of disputes, making it costly and time-consuming. | It helps avoid probate court in a lifetime or after death. |
| 7. Privacy | The will becomes a part of the public record post-demise of the testator. | It remains private. |
| 8. Creditors | Creditors can lay claim over the assets. | Creditors can't lay claim over trusts if they are irrevocable. |
| 9. Estate taxes | Estate taxes cannot be avoided. | Irrevocable trusts can provide tax benefits, while revocable ones don’t. |
| 10. Guardianship | Nominates guardians for the children | Not applicable here |
What Is A Will?
A will or last testament refers to a document instituted by a person or grantor to outline the manner of distribution of assets and property after their death. It needs to be signed and witnessed adequately per laws for its legal implementation after filing it in a probate court. It includes nominating guardians for pets, dependents, or minor children, along with sharing instructions for burial with the executor of the will. The will acts as an estate plan to protect one's family and property in case of accidental or natural death.
Legally, the will is enforced after one dies under the supervision of a court, which determines the validity of the will to distribute the property as per the will. It has three main elements- testator, executor, and beneficiary. The testator creates estate planning, the executor oversees the distribution of assets, and the beneficiary receives the property or asset. If one does not put a will in place, then the asset distribution is done per state law.
Example
Suppose a 60-year-old individual, David, has a set of properties in a market complex in New York. As David is apprehensive about his weakening body and deteriorating health, he decides to prepare a will to make sure his assets are distributed well.
He calls a lawyer and reveals his plans for property and asset distribution after his death. Hence, the lawyer prepares a legal will, incorporating all his wishes regarding the property distribution between the grantor's wife, Diana, 55, and son, 40. He also sets aside cash to complete the court's probate after his death, if required.
What Is A Trust?
A trust refers to a legal contract created to handle a complex fiduciary procedure, allowing a third party called a trustee to hold and manage the assets on behalf of the beneficiaries. It gets prepared when the owner or the grantor wants to transfer the assets and property to the trust account through legal means per state laws. They come into effect during the lifetime of the grantor or after their death. They form an essential part of estate planning to minimize estate taxes and offer other related benefits.
It segregates ownership of an asset, helping in the creation and preservation of assets & financial legacy while safeguarding the same for the grantor's loved ones. A trust is of two main types – revocable with changeable terms and irrevocable with unchangeable fixed terms. Other forms include:
- Charitable trust, where a person hands over their property for charity purposes; spendthrift trust, for controlling excessive spending by beneficiaries;
- Special needs trust for disabled beneficiaries; and
- Life insurance trust, which includes an insurance policy with a death benefit to protect the beneficiaries from paying estate taxes after the death of the grantor.
Example
Let's say Dollex Samson, a 50-year-old entrepreneur, has a life insurance policy of $1 million. Samson also has a family to look after, but he is afraid that the policy benefit might get taxed. Dollex feels his wife and kid might not receive the full amount of the policy. Hence, he consults his lawyers and institutes a life insurance trust with both his wife and kid as beneficiaries to receive the insurance maturity benefits when needed.
Therefore, if Dollex dies or the policy matures during his lifetime, his policy amount would not be subjected to a tax deduction, and his family would get full benefits through trust.
Similarities
Though a will and a trust differ from each other in multiple aspects, they still share a few similarities. Let us explore some of them:
- Both are legal contracts that allow individuals to pass on their assets and properties to their heirs.
- These documents ensure that the instructions relating to the distribution are followed and that the share of properties is distributed to chosen beneficiaries accordingly.
- Both the will and trust can be revised before the grantor's death, given they are in a sound mental condition. However, for a trust to be changeable, it must be revocable in nature.
