The Differences Between a Trust and a Last Will and Testament
Most people have heard the terms “trust” and “will” but cannot always define the differences. The two documents serve different purposes but can work together to create a complete estate plan. A will is governed by probate law. A trust is governed by contract law. Each document has its advantages and disadvantages.
Effective Date. A will is not in effect until you die. A trust, conversely, is effective once executed and funded with assets. A trust can be used during your lifetime for specific purposes, including ensuring you are financially secure during a disability or legal incapacity.
Probate. The property subject to your last will and testament passes through probate. That means a court oversees the administration of the will. The court also ensures that your will was properly executed and is valid. Finally, the court requires that your executor or personal representative file documents, such as inventories and accountings, to ensure that your property is being distributed in accordance with your will. A trust passes outside of probate, so a court will not oversee the process, which can save time and money. Unlike a will, which becomes part of the public record, a trust can remain private.
Tax Planning. A will cannot protect your assets from an estate tax. If your estate exceeds a certain threshold, a trust may be able to create certain tax advantages.
Out of state property ownership. If you own real estate in more than one state, a trust will help you avoid opening probate matters in each of those states. Ancillary probate estates can be costly and cumbersome. By drafting a trust and transferring all of your real estate into that trust, your trustee avoids having to probate real property in multiple states.