What is the difference between a will and a trust?

Everyone has heard of a will, or last will and testament. Trusts are often mentioned with the same breath. But what, practically, is the difference between them? And how do you know when you need to have a trust prepared?

What is a will and how does it work?

A will or last will and testament is a legal document in which a person states how they want all their property - their estate - to be divided and given away upon death. All states have statutes that describe who can make a will and how it must be done in order for it to be valid. When a person gives away land or personal property (called a devise or bequest, respectively) with their will, the will must go through probate. Probate is the process by which a court determines whether the will is valid and then supervises the release of the estate assets.

I’m fairly confident everyone has heard of probate. One often hears that it is desirable to avoid probate, but why is that?

It is time consuming. The average probate estate takes 12-18 months to close, and it may take significantly longer if there are warring beneficiaries. Even where there is no dispute, it takes time because the court must authorize the executor - the person named by the decedent to wrap up their affairs - to act.

Another reason people prefer to avoid probate is because it is public. Probate cases are a matter of public record. Many people wish to avoid scrutiny into their personal affairs, and to keep their financial information private.

The key thing to remember about a will is that it only comes into effect once you’ve died. If you want to transfer property while you’re still alive, you have to do it another way, and setting up a trust is one possible option.

What is a trust and how does it work?

A trust is not so much a “thing” as a relationship, a specific arrangement for handling the transfer of assets. A trust is created with a legal document called a Trust Agreement. Like wills trusts have their own set of requirements set by state law. But rather than simply appointing a person - like the executor in a will - to carry out the wishes spelled out in the trust agreement, a trust actually splits ownership.

To create a trust a person, called a grantor or settlor, must give property to another person, called a trustee, who then holds the property for the benefit of a third party, called the beneficiary. Think of it like a triangle; there has to be 3 corners: settlor/grantor, trustee, beneficiary. So when the settlor/grantor gives property to the trustee, what they are actually doing is giving the trustee legal title to those assets, meaning, the trustee has the legal right to possess those assets. They don’t get the benefit of those assets - called the beneficial interest. That goes to the beneficiary.

Let’s look at a real life example. Say I own 100 shares of stock in a large corporation. They’re quite valuable. I want one of my children to get those shares of stock, but I don’t want to give my child the stock right now (notice I’m not specifying how old the child is). What I can do is set up a trust. I am the settlor and my child is the intended beneficiary. I decide to make my spouse the trustee. So what I’ve done is I’ve given my spouse legal title to the 100 shares, but my spouse gets none of the financial benefit of that ownership: whatever money comes from that stock goes only to my child as I direct in the trust agreement.

Can’t I just do this with my will? Sure! If you don’t mind those three caveats discussed above, then absolutely just give it away in your will.

But trusts are amazing tools! Trusts can be set up in so many creative ways to address a myriad of problems and desires. Take my example above. What if I want to give my child the dividends generated by those 100 shares for a period of time and then dole out the ownership of those shares at specific ages? A trust can do that, but a will can’t. And unlike a will, beneficiaries can receive their beneficial interest right now instead of having to wait until the owner passes away.

Then how do I know if I need a trust?

Trusts are amazing tools, but not everyone needs them.

Avoiding probate is certainly one reason why people set them up. But that isn’t the ONLY way. Many assets can be transferred without a will or a trust. For example, land, buildings and vehicles can be transferred upon death depending on how they are titled, and beneficiary designations on retirement accounts and life insurance policies can effectively transfer everything one owns.

But one of the surest signs you may need to set up a trust is if you have a specific way you want your assets distributed over a period of time and you want those assets distributed while you’re still alive. For example, if you want to dole out a large inheritance slowly over time, a trust is a great way to do that.

The takeaway

Wills and trusts are two different estate planning tools. What tools you use to accomplish your estate planning goals depends on what you own and how you want it distributed.