A will versus a trust: What’s the difference? 

Let’s start with the basics. If you pass away without a Will or a Trust, there is a process under state inheritance laws that details what happens to a person’s estate assets when that person dies without a will or trust. Intestate succession refers to the order in which spouses, children, siblings, parents, cousins, etc. are entitled to inherit from a family member when no estate planning documents exist. 

Generally speaking, the unlimited marital deduction provision within the United States Estate and Gift Tax Law allows the passing of wealth from a U.S. citizen or resident decedent to a surviving U.S. citizen or resident spouse without incurring gift or estate tax liabilities. (Even more complications occur when one or both spouses are not U.S. citizens or residents, but we will discuss international estates and foreign owners another time.) Here, we will discuss some of the basic estate planning complexities when wealth is passed to subsequent generations. 

For example, in California, if a married individual domiciled in California passes away without a will, their community property (i.e. assets acquired during the marriage that belong to the marital estate (subject to some exceptions), such as income earned during marriage) will be distributed to their surviving spouse. If the individual also has separate property, one-half of that separate property will be distributed to the surviving spouse if the couple has only one child, with the child entitled to the other half of the separate property. The surviving spouse will get one-third of the separate property if the couple have two or more children, with the children getting the other two-thirds. Every state has its own intestate succession laws as well which can also apply to out of state decedent (such as, for real property in that state). 

To gain control over how you want your affairs handled, it is important to create a will and, as necessary, one or more trusts. Which type of estate plan you choose depends on your specific situation. 

What is a will? 

A will is a written instrument that is legally executed and makes arrangements for how you want your affairs handled and assets distributed after you pass away. 

 A will is especially important if you have young children, because you can appoint guardians. If you don’t appoint a guardian, your surviving family would have to get help from the probate court to have a guardian appointed and that person may not be who you want entrusted with your kids. 

You can also define how you want your assets to pass to a minor child.  You can dictate that money should be held in trust for a minor child until they reach an age of maturity (like 18 or 21). You can appoint a trusted individual as the trustee of this trust that can help carry out your wishes from beyond the grave. 

Depending on the rules of your state, a will allows you to disinherit a child if you want to do so. You may also disinherit a spouse if you are in a community property state (like California). 

A will is an effective tool for estate transfer, but there are some drawbacks. A will is publicly recorded after your death, and anything left by a will must go through probate court. There may be challenges to the validity of the document, and may be subject to federal estate and income taxes. 

What is a trust? 

A trust is a fiduciary relationship where you give another party authority to handle your assets for the benefit of a third party, your beneficiaries. It’s similar to a will because it is another method of estate transfer, and you have all the same benefits of dictating how you would like your affairs to be handled after death. 

There are many categories of trusts, but let’s focus on a revocable living trust, which is most commonly the only trust necessary for fairly uncomplicated estates that are not taxable. A revocable living trust is created when the property owner (trustor) is alive, and it may be changed during the life of the trustor. The trustor maintains ownership of the property held by the trust while the trustor is alive. A person called a trustee will be named in the document to control the distribution of assets following the wishes of the trustor, in accordance with the trust document and its mandates. The downside is that trusts tend to be more expensive than wills to create and there are usually ongoing administrative requirements (although minimal with a revocable trust).  

One major benefit of a trust is that unlike a will, a revocable living trust passes property placed in the trust outside of probate court. Probate court is where your heirs could spend months sorting out your estate and easily expend 2-5% of the estate due to administration expenses, including court costs and fees. By avoiding probate court, your property can be given immediately to your beneficiaries after you pass away.  At the very least, generally, most estates would benefit from a will and a revocable trust. Additionally, even non-probate assets, such as life insurance and IRAs can pass through these trusts which allows the trustor to stagger those distributions directly  to beneficiaries (such as life insurance proceeds passing directly to a child who may be legally an adult  but would be better served with managed funds or needs some creditor or divorce protection on the assets). Revocable trusts allow for significant post-mortem control on asset distribution and management beyond probate administration and also, if funded properly, can entirely eliminate the often expensive and inefficient probate process.