Wills vs Revocable “Living” Trusts
What’s the difference between a will and a trust? And, why are revocable trusts becoming more common?
Overview
Who Knew? The American Red Cross has designated August as “Make-A-Will” Month. Anyone over the age of 18 should have a will, but… let’s be honest, many people don’t have a will at all or one that is up-to-date. Common guidance suggests that you update your will once every 3 to 5 years, or at least review it to make sure it reflects the where and what of your wishes. I think most of us who don’t have a will definitely have that task as a high-priority to-do on our list. It’s less complicated than you think. (Check out our earlier post on Easy, Cheap, and Legal ways to get your will together.) But what if a traditional will isn’t the best option? Enter the “living will” or a revocable trust. That’s just another kind of will right? Well.. not exactly. Let’s establish the basics so we can explain the differences.
What’s a Will?
A will, or last will and testament, is the legal document that spells out the details of how a person's estate (their property, money, etc.) will be managed and distributed upon their death. If you’re curious, the nitty-gritty terminology is available from the Cornell Law School.
The four key components of a will answer the following questions:
Who’s Will is it? - The identity of the will’s creator and their information.
What is the Document’s Purpose? - Declaration of Intent for a will states the document is a will and accurately captures the wishes of the will’s creator, identifies beneficiaries, and revokes any previous wills.
This last one is important because if there are multiple copies of a person’s will floating around, when it comes time to settle the estate, this is where issues will arise.
Who are the Beneficiaries? Specifying beneficiaries details, the … who gets what and in what order.
Who is the Executor? This is the person who will manage the process to ensure the wishes of the individual are met (usually with a backup or two listed).
What’s a Revocable Trust?
A revocable trust or “Living” trust is a type of trust that allows you to modify the assets listed and distributed to beneficiaries and the terms at any time until your incapacity or death.
Here are some key things to know about a Revocable Trust:
Assets - The ownership of any “assets” is assigned to the trust (rather than you as an individual) and you retain complete control over those assets.
Distributions & Beneficiaries - Details how your assets are distributed (including during your lifetime) and who will receive your assets.
Pour-over Will - A revocable trust is almost always paired with a will called a pour-over will. A pour-over will is a last will and testament that serves as a safety device to capture any assets that are not transferred to or included in a living trust.
Probate - The combination of a revocable trust and a pour-over will offer a failsafe to protect any outlying assets from probate, which is what most revocable trusts are built to avoid.
Some of the benefits of a revocable trust include:
Trust Management: If an individual is incapacitated, a revocable trust specifies a trustee that can manage the trust and any assets without the need for court intervention. It’s a characteristic that isn’t part of a traditional will - which only applies when the individual dies.
Asset Distribution: A revocable trust includes the ability to specify conditions or staggered distributions, to manage inheritances for minors or other beneficiaries who may not be financially responsible.
Tax Benefits: One of the main reasons an individual may create a revocable trust is to help protect beneficiaries from tax consequences. Even for modest sums of money, income taxes can take a huge chunk and can be better protected by proactively minimizing estate taxes.
A Quick Comparison of Wills vs. Revocable Trusts
| Topic | Wills | Revocable Trusts |
|---|---|---|
| Time & Expense | Easy to create, relatively low cost. Easy to update. *Will likely result in probate and must be updated to be useful |
Varies based on your estate. More complicated estates will require more attorney hours, which could add to the cost. |
| Assets Covered | Can be applied to everything. | Is more often used with financial assets and real estate. |
| Flexibility | Can update at any time but you have to keep track of the latest version to avoid potential will contests. | Can be changed at any time, typically through an attorney. |
| Probate | Yes. Probate will have to take place in each state where assets are held. | No. Assets do not have to go through probate. |
| Implementing | Effective upon death. | Effective as soon as it’s set up and assets are assigned to the trust. |
| Privacy | Becomes public during probate | Remains private |
| Clauses for incapacity | No provisions available | Applies if a person is incapacitated. |
| Tax Benefits | Assets may be subject to costly estate taxes. | Assets can be organized into trusts to reduce estate taxes. |
What Should I Choose?
While setting up a revocable trust may be more expensive initially, it has the advantages of protecting your trustees from the time and expenses associated with probate and the process that can involve. A revocable trust offers flexibility to make changes and can be applied if you’re temporarily incapacitated. It protects your privacy after death and can be established to include a pour-over will for any assets that aren’t identified in the revocable trust.
For many people, a revocable trust may be a better option than a standard will. Since this type of estate planning may not be familiar to you, we think it’s worth investigating.
One of the most ironic things about wills and trusts is that it’s often the folks with the most modest estates and the least amount of wealth who end up having more complicated end-of-life logistics. No matter what your estate includes, protecting your beneficiaries ensures that your wishes are easy to resolve. It’s one of the most impactful gifts that someone can inherit.
Learn More
Read a more detailed explanation of a pour-over will
Learn more about choosing a will or a trust
Learn more about revocable trusts