Wills vs. revocable trusts: Which one should I have?

Estate planning terminology can be confusing. Here, we break down the similarities and differences between wills and revocable trusts, revealing how each of these tools can be used to accomplish your estate planning goals.

What is a will?

A will is a legal document that describes how a person’s assets will be distributed after their death. A will not only identifies your chosen heirs – it also names those in charge of carrying out its terms. And critically for parents of young children, your will is the only place where you can officially tell a court who should be the guardian of your minor children in the event of your death.

Only assets you own in your individual name without a beneficiary designation and tenant in common interests are governed by your will. Notably, your will generally does not control life insurance policies, accounts with rights of survivorship or other accounts for which you have named a beneficiary (e.g., retirement accounts and “transfer on death” or “payable on death” accounts). However, if you fail to name a beneficiary for these accounts, your will may end up controlling their distribution.

Your will doesn’t become effective until your death. If you own assets in your individual name or as tenant in common at the time of your death, your will may be subject to probate – the formal process by which a will is submitted to and approved by the courts and creditor claims are settled. Probate is public and can take a considerable amount of time. In some states, the court, legal and administrative costs of the probate process can become very high and may consume a noteworthy portion of the value of the estate. You should take your state’s probate costs into consideration when choosing the structure of your estate plan.

What is a revocable trust?

A revocable trust (also known as a living trust) is a legal document that, like a will, describes how a person’s assets will be distributed after their death. A revocable trust also names individuals (known as trustees) in charge of carrying out its terms.

Unlike a will, a revocable trust is generally effective upon funding and can be used to manage assets during your lifetime. You typically serve as the trustee of your revocable trust during your lifetime and fund the trust by transferring assets – including financial accounts as well as real estate and tangible personal property such as art, furniture and jewelry – to the trust. You may also name your revocable trust as the beneficiary of life insurance proceeds or other accounts for which beneficiary designations are permitted.

Revocable trusts generally include instructions for the management of trust assets during your lifetime. They can be an effective tool in planning for potential incapacity, since they allow a successor trustee to step into your shoes to take over management of trust assets should you become incapacitated.

While revocable trusts can be more costly to set up than a will, assets held in your revocable trust avoid probate, providing both privacy and efficiency in the transition of assets after your death.

Even if you plan to use a revocable trust as your primary estate planning vehicle, it may be advisable to use a will in tandem with your trust to nominate guardians for your minor children and direct that any probate assets – those assets you may have missed when funding your trust or wanted to keep in your name – be poured over to your revocable trust.

Regardless of which document you choose, you should periodically review and update your estate plan to reflect major life changes.

The takeaway

Every situation is unique, and there is no one-size-fits-all approach to estate planning. While having a will is certainly better than not having a plan at all, a revocable trust may provide a more efficient way to manage assets during your lifetime and after your death.

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