Differences between wills and living trusts

Created date

November 29th, 2019

Wills and living trusts are two important estate planning tools, and it’s important to understand the differences between them so you can choose the right option for your family. Both wills and living trusts spell out what you want to happen to your assets after your death—but they accomplish that goal in different ways.

Neel Shah, a New Jersey elder law attorney and financial adviser (lawesq.net), uses the analogy of baking a cake to explain the differences between wills and trusts. A will, he says, is like leaving your family a recipe to bake a cake after your death. Someone will have to go buy the eggs, flour, and sugar and then combine them in the right proportions to make the cake.

“Since a will is a recipe, it involves somebody doing a lot of the work later,” Shah says. “Somebody will have to gather your assets and go through the probate process to transfer the assets.”

Establishing a living trust, on the other hand, is like baking the cake while you are still alive. You control how the cake is made, and you can eat it and share it with whomever you choose.

“But whatever’s leftover just makes its way to the people you’ve designated. No baking required. This is a revocable living trust,” Shah says. “In a living trust, you do more of the work today by consolidating your assets or aligning your beneficiary designations now so that there’s less work later.”

Time and money

Wills are generally relatively inexpensive and easy to create. The primary drawback of a will is that it is subject to probate, the court system that finalizes people’s affairs after their death. Like any court proceedings, probate can take time and cost money.

“In order for a will to go into effect, it must be authenticated by a court-supervised probate hearing,” says Mollie Moric, a legal analyst for Legal Templates (legaltemplates.net). “Unfortunately, this can be a lengthy process that racks up substantial legal fees and taxes.”

Another limitation of wills is lack of privacy. The contents of your will become public record when it is filed with the court for a probate hearing. 

“The transfer of any or all of your assets can be contested publicly, no matter who you listed as a beneficiary,” says Helen Greenwell of CPA Financial Advantage (cpafapc.com). “How many times have we heard that played out in the media, especially in situations where a second spouse and children from a first marriage begin a legal (and pricey) fight for the decedent’s assets?”

Living trusts typically make sense for high-net worth individuals and those with complex estates. For example, Shah says people with real estate in multiple states would want to set up a trust to avoid probate in multiple states. Trusts are also useful for estates that include business interests, investment properties, or partnerships.

Shah says another advantage of living trusts is that they are in effect in the event someone becomes incapacitated; whereas, wills don’t take effect until a person’s death. While you may have given someone power of attorney, Shah likens that to giving them the keys to the car and asking them to take you where they think you belong.

“However, most clients prefer to give them not just the keys to the car, but also a GPS with a list of rest areas and sites they want to see along the way. That’s the trust,” Shah says. “Trusts are valid as soon as you sign them and govern all the assets held in the trust.”