The unexpected could happen anytime, so it’s always a good time to review your estate planning needs. One of the most fundamental choices you can make is whether you prefer to hold assets in a revocable trust or simply pass them on in a will.
“For an individual with assets under their control, having a mechanism in place to direct who is in charge and who gets what is important,” says Stephen Taddie, director at Focus Partners Wealth in Phoenix. Here are the things to consider and why a will may not be sufficient.
Key takeaways
- A will is a legal document that outlines how someone’s assets should be distributed after their death.
- A revocable trust, sometimes called a living trust, is a legal structure that provides protection for your assets.
- Both have several pros and cons. Wills are often faster and cheaper to set up, but revocable trusts can provide more protections.
Revocable living trust vs. will: Main differences
Wills are popular estate-planning documents because they are relatively cheap and easy to set up. In contrast, a revocable trust may be more costly to set up, though they are often cheaper in the long run.
One of the biggest differences between a will and a revocable trust is that a will requires probate court for validation purposes. Even if you name beneficiaries for all your assets, the process can take one or two years to complete. Revocable trusts avoid probate, making them much simpler for your heirs.
Another significant difference is in privacy. Wills are public records, so anyone can theoretically look up the details of the assets you passed to your beneficiaries. Revocable trusts are not part of the public record, so no one can look up the details of your assets.
Also, consider what happens if you become incapacitated due to illness. In this scenario, if you have a revocable trust, a trustee can manage your assets. A will doesn’t grant this privilege. Instead, the trustee must be named in a medical advance directive and a durable power of attorney.
| Will | Revocable trust | |
|---|---|---|
| Effective date | Upon death | Upon creation |
| Probate | Yes | No |
| Privacy | Public | Private |
| Cost | Less expensive to create, more expensive to administer | More expensive to set up, but often less costly in the long run |
| Control | Limited – after death, executed by the executor according to probate court | More flexible – managed by the trustee |
| Management during incapacity | Requires separate documents | Built in – trustee can manage assets during incapacity |
| Guardians | Can name guardians for minor children | Cannot name guardians |
What is a will?
A will “directs who should receive property that is in your name only, without a designated beneficiary, upon your death,” says Michael T. Baker, an attorney at Baker Law Group in the Boston area. “Without a last will, property may be distributed by the courts to your next-of-kin, regardless of what your wishes might have been.”
Property owned jointly (say, with a spouse) passes directly to the surviving owner(s). Accounts such as a Roth IRA with a named beneficiary go directly to the beneficiary, and anything in a trust follows its terms. That’s one reason to check your accounts now and make sure they have beneficiaries named.
Pros
- Cheap and straightforward to set up
- Allows the naming of a guardian
- Lets you specify how you want to distribute your assets
- Allows you to name an executor
Cons
- Must go through probate court
- No legal effect during incapacitation
- Part of the public record
- May not control all assets
What is a revocable trust?
Revocable trusts, sometimes called living trusts, are being used more often in place of wills to reduce the expenses and delays of probate, says Baker. “Since they can be altered, they provide much of the flexibility of a will with the power of a trust.”
A trust is a legal structure that provides certain protections for your assets. One of the key benefits of the trust is being able to sidestep the probate process entirely, making it easier on heirs to claim the assets you want them to have. When you create a trust, you name a trustee (typically yourself or jointly with your spouse) whose job is to manage the trust’s affairs. You’ll also name successor trustees who manage the trust when you’re incapacitated or deceased.
When assets are held in a revocable trust, it’s the trust that owns them, though you are the beneficiary. For example, you can move assets in and out of the trust or even dissolve the trust and retake the assets. That’s in contrast to irrevocable trusts that can offer substantial tax benefits but that force you to relinquish control of the assets.
“In a standard revocable living trust, you are the trust maker, the trustee, and the beneficiary while you are alive,” says Shann Chaudhry, an attorney in San Antonio, Texas. “Then your designated successor trustee and beneficiaries take over upon your passing.”
Pros
- Avoids probate
- Not public record
- Trustee can manage assets
- Allows changes and cancellation
Cons
- Initially more expensive to set up
- Doesn’t protect from creditors
- Not possible to name guardians
Revocable trust vs. will: How to choose
1. A will can be set up faster and cheaper
A will can be set up faster than a trust, making a difference in urgent circumstances.
“[A] will can be prepared more easily than a trust can be prepared and funded,” says Morris Armstrong, head of Morris Armstrong EA in Cheshire, Connecticut. He stresses the funding aspect, which requires you to retitle any assets that you want protected by the trust.
“Without the proper titling of assets, you still have to go through probate, and you just spent all that money and time creating the revocable trust and still have to go through probate at death,” says Alvina Lo, chief wealth strategist at Wilmington Trust in the New York City area.
However, one downside is that wills may have to be signed and witnessed in person, although some states have allowed video conferencing following the Covid-19 pandemic.
2. A trust is better for an incapacitated person
However, a trust structure offers a key benefit if someone becomes incapacitated due to illness. To that end, trusts are usually accompanied by two other legal documents: a medical advance directive and a durable power of attorney.
“These documents allow people to make medical decisions on your behalf and manage your finances if you become incapacitated,” says Tracy Craig, a partner at law firm Seder and Chandler in the Boston area. “Young people need to be thinking about this and taking it seriously in a way that they typically have not in the past.”
“If you were to become disabled by a complication, a revocable trust could be advantageous over a will,” says Leslie Tayne, an attorney at Tayne Law Group in the New York City area. “Your successor trustee can step in and handle your assets while you’re alive but unable to do so, and this isn’t an option with a will.”
“One oddity that can crop up is that some custodians do not honor a durable power of attorney with respect to directing a trust, and require that a co-trustee be named or a successor trustee step up,” says Taddie. It can be a challenge “because during a mental or physical decline, the trustor may fear giving up control, and a named successor trustee may hesitate to class a loved one as incompetent.”
3. Trusts may be cheaper and easier than you think
While consumers may view trusts as something that’s above their means, it may make sense with a lower net worth than you might expect.
“For anyone who owns a home or has over $150,000 in assets, a trust-based estate plan is typically better suited, since it protects your assets,” says Andrea Woroch, a consumer and money-saving expert.
“These days you can create a will or trust online in a matter of minutes and right from home for far less,” she says, noting one website where a trust can be established for about $400.
And if even that stretches the budget (and even if it doesn’t), you can set up a legally binding trust or will for no charge at FreeWill.
However, more complex trusts may need the help of a lawyer, and complications may arise, even in well-designed trusts.
4. Trusts may be better with backed-up courts
The process of settling a will could take much longer than you expect, especially if there are any delays in the system. So a trust may be a better solution because it allows you to skip probate.
“While you’re waiting for the courts, who will have the authority over your accounts to pay for immediate items, like the mortgage and funeral costs?” asks Lo.
FAQs
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You can have a will and a living trust, and that is often the best way to set up your estate. A revocable living trust helps you manage and distribute your assets appropriately while avoiding probate. A will can then capture any assets not mentioned in the trust and lets you name guardians.
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A living will is a document that outlines the medical care you prefer should you become incapacitated and unable to communicate. This is when a living will becomes effective, while a regular will is only effective after death.
While a regular will outlines the handling of your assets, a living will focuses on medical decisions. As such, a living will may also be called an advanced healthcare directive.
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Certain assets, such as retirement accounts, vehicles and life insurance policies, should not typically be placed in a revocable trust. Placing these assets in a revocable trust can create problems; for instance, putting retirement accounts in a trust can trigger a taxable event. However, you can name the trust as a beneficiary to avoid this.
Bottom line
A plan for your estate is important, especially given how quickly health issues can become serious.
“Always remember that someone has to have the mental capacity to create many legal documents, and waiting too long can be problematic,” says Taddie.
And given the complex nature of estate planning, you need an attorney for all but the simplest operations to ensure that your assets are distributed according to your wishes. Proper planning allows you to pass your assets to your heirs exactly as you intend.
— Bankrate contributor Bob Haegele contributed to an update of this article.
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