What’s the difference between a will and trust?
A will is a legal document that describes how you want your assets distributed when you die. How things get distributed is actually controlled by a legal process called probate — that’s when the court controls and supervises the allocation, instead of your family members. You’ll want to avoid probate because it’s time-consuming and expensive owing to lawyer and court costs. You can stop the probate process by having an estate plan in place.
With a living (revocable) trust, you maintain control and can change the trust, or even dissolve it, for as long as you’re alive.
A key difference between a will and a living trust is that a will doesn’t take effect until you die, meaning it can’t offer you protection if you can’t make decisions because you’re in a coma or have a debilitating illness. With a living trust, someone you designate will take care of your affairs, not the court — it’s not part of public record. It’s not protected from creditors (so if you owe money, creditors can take it out of your trust), and you’ll have to pay taxes on the income earned by the trust. You also can’t avoid estate taxes with a living trust.
Another option is an irrevocable trust, which can’t be changed or dissolved once it’s been created. You may have to pay gift taxes on the value of the property transferred into the trust, but all of the property in the trust is out of your taxable estate. Property transferred to your beneficiaries through an irrevocable trust will protect you from probate. Also, property in an irrevocable trust may be protected from your creditors.
To avoid probate, create a comprehensive estate plan. A comprehensive estate plan is more than just a will and a trust. Typically, it will contain a living trust, a pourover will (where all of your property goes to the trustee of your trust), an advanced health care directive (this is a power of attorney for health care), durable power of attorney and guardianship (if you have children who are minors).