When planning for what happens to your assets after you’re gone, two of the most common tools you may consider are wills and trusts. There is much that can be said about both categories of tools, but in broad terms, a will is a written document that meets certain legal formalities such that a court will follow its instructions for how to distribute a deceased person’s assets. A trust, by contrast, is a legal entity created by a person (typically called the “grantor” or “settlor”) with the purpose of managing assets for a set of beneficiaries.
Wills vs. Trusts: Basic Definitions
There are several kinds of trusts that a person can create. For now, let’s focus on the kind known as a revocable living trust (or an inter vivos trust). A revocable living trust allows the grantor to have this separate entity to which they can transfer assets but retain the option of revoking the trust later and taking back the assets if needed. The revocable living trust can be set up so that it continues to exist after the grantor dies, or its assets may be distributed to its beneficiaries upon the grantor’s death.
One key difference between a will and a trust is that many, if not most, wills must go through the probate process in state court (a legal process where the court oversees the distribution of your assets), whereas the operation of a trust is not supervised by a court. This key difference may lead one to ask whether a trust can serve as substitute for a will.
To explore that question, it is helpful to consider several other differences between wills and trusts.
Key Differences to Consider
Under Virginia law, a trust does not need to be in writing and thus does not need to be signed or notarized. The creation of a trust also does not require witnesses to be present or sign anything. A will, by contrast, requires all of these things: it must be in writing and signed, with witnesses present, and the will ideally should be notarized.
Wills and trusts also differ in when they take effect. When a person signs their will, that will sits dormant until the person dies, at which point it is reviewed, (often) probated, and put into effect. A trust, on the other hand, goes into effect as soon as it is created. The grantor may fully fund the trust to carry out its purposes immediately, or the grantor may leave it unfunded or only partially funded for a time. Whatever the grantor chooses to do, the trust is available at any time for use.
Speaking of use, a grantor may serve as the trustee for the trust they have created and may direct its actions. It is good practice for the grantor to name a successor to serve as trustee in the event the grantor passes away or becomes incapacitated. This is of course not the case for a will. Since the will does not go into effect until after the person dies, that person must name another person to serve as the executor to carry out the wishes expressed in the will.
From a bigger picture perspective, differing sets of laws have grown up around wills as opposed to trusts. Because wills are often created long before they are put into effect, the law has developed many provisions that “fill in the blanks” where a will has not accounted for various circumstances. This is not so much the case for trusts, where management of the trust typically begins soon after the trust is created.
An example can demonstrate this difference. Say that Ms. X creates a trust that names her two children A and B as beneficiaries of the trust. Later, Ms. X has another child, C, and passes away a few years later, never having added C as a beneficiary of the trust. If the trust does not include language addressing the possibility of after-born children, then C is not entitled to any assets held by the trust.
A final point regarding the differences between wills and trusts: these tools can have significant differences in how they are treated for tax purposes. This is a complex topic best addressed in a separate post. An experienced and knowledgeable attorney can prove invaluable in helping navigate these complexities.
Conclusion
In sum, wills and trusts have important differences, and each has its uses, quirks, and drawbacks. Rather than choosing one or the other when crafting an estate plan, often the best approach is to use both in a coordinated way. For example, a grantor can set up a revocable living trust that sets forth how the grantor’s assets are to be used for the good of the beneficiaries named in the trust and then set up a relatively simple “pour-over” will that directs all assets still owned by the grantor upon death to be transferred to the trust. In any event, it’s a good idea to work with an attorney familiar with the ins and outs of both tools when putting together your estate plan. With thoughtful preparation, a will or a trust, or both, can do much to help you be sure that those you care about will be looked after.
If you’re unsure which tools are right for your situation, let’s talk. A thoughtful estate plan doesn’t just protect your assets—it protects your people.