Which One Do I Need?
04 Mar Wills vs. Trusts: Which One Do I Need?
Planning for the future is a crucial aspect of responsible adulthood. Deciding how to distribute your estate after you’re gone can give you peace of mind about the future. Two common tools for achieving this goal are wills and trusts—but which one is right for you? We put together this guide explaining everything you need to know about wills vs. trusts to help you make the best decision.
What Is the Difference Between a Will and a Trust?
Although wills and trusts often serve similar purposes, they are distinctly different in how they function and when they become effective. A will is a legal document that outlines how you wish your assets to be distributed after your death. It goes into effect only after you pass away, and must go through the long, expensive probate process.
A trust, on the other hand, holds your assets on behalf of your beneficiaries. After you pass away, the successor trustee manages its assets and ensures their smooth distribution. The assets funding the trust do not go through probate, so your loved ones don’t have to deal with going to court. Unlike a will, a trust can go into effect during your lifetime if you become incapacitated.
Six Types of Wills
1: Simple Will
Also known as a last will and testament, this basic will is the most common type and is a straightforward way to detail your wishes.
2: Living Will
A living will is a type of advance directive used to address healthcare decisions and end-of-life preferences.
3: Testamentary Trust Will
This type of will allows you to set up a trust for a specific beneficiary upon your death. However, the will must go through probate before the trust can be created.
4: Pour-Over Will
A pour-over will is used as a failsafe for your revocable living trust. Any assets not funding the trust at the time of your death will automatically transfer to the trust. Like all wills, however, a pour-over will must still go through probate.
5: Holographic Will
A handwritten will is called a “holographic” will. Unlike other wills, no witnesses are required to sign a handwritten will for it to be valid in Arizona.
6: Electronic Will
An electronic or “e-will” is a will that’s digitally created, signed, and stored. Arizona began recognizing electronic wills in 2019.
Wills: Pros and Cons
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- Simplicity: Creating a will is generally a simpler and cheaper process compared to setting up a trust.
- Accessibility: Wills are readily accessible, and can be easily amended as your circumstances change.
- Guardianship: Wills allow you to appoint guardians for minor children, ensuring their wellbeing if something happens to you.
- Subject to Probate: Wills must be validated through the probate process, which can be time-consuming and costly for your loved ones.
- Public Record: Wills become part of the public record during probate, potentially exposing your financial affairs to prying eyes.
- Limited Control: Wills do not offer as much control over the distribution of assets as trusts do, especially for complex estates.
Six Types of Trusts
1: Revocable Trusts
With a revocable or “living” trust, you remain in control of your assets during your lifetime. You can access, add, and remove assets at any point.
2: Irrevocable Trusts
With an irrevocable trust, you are no longer the owner of the assets. No one can make any changes to an irrevocable trust. After you pass away, a revocable trust automatically becomes irrevocable.
3: Charitable Trusts
Charitable remainder and charitable lead trusts allow you to leave some or all of your assets to your favorite nonprofit organization.
4: Special Needs Trusts (SNTs)
An SNT allows you to leave an inheritance to a beneficiary with special needs without affecting their eligibility for government assistance.
5: IRA Inheritance Trusts
With an IRA inheritance trust, your beneficiaries can continue to benefit from your IRA for an extra 10 years after you pass away.
6: Pet Trusts
You can leave money intended for your pet’s care in a pet trust, and assign your preferred caregiver as the trustee. Unlike a will, leaving money in a trust ensures that the funds are used exactly per your instructions.
Trusts: Pros and Cons
- Avoiding Probate: Trusts are not subject to probate, allowing for a quicker and more private distribution of assets.
- Asset Management: Trusts provide detailed instructions for managing and distributing your assets, offering more control and flexibility than wills.
- Privacy: Unlike wills, trusts stay private after you pass away, keeping your financial affairs confidential.
- Complexity: Setting up a trust is a complex process, so it’s important to consult an experienced estate planning attorney.
- Cost: Trusts are typically more expensive to establish than wills.
- Formality: Trustees must adhere to specific legal formalities, and failure to do so could result in legal challenges.
Do You Need a Will If You Have a Trust?
A living or revocable trust can serve as the primary vehicle for managing and distributing your assets, but it’s also a good idea to have a pour-over will as a backup. Pour-over wills ensure that any assets not explicitly included in the trust are still distributed according to your wishes after you pass away. Otherwise, the court will distribute the remaining assets according to the laws of intestate succession. At Phelps LaClair, we recommend everyone who sets up a living trust also creates a pour-over will.
How to Decide When You Need a Will vs. a Trust
In most cases, a trust is the best choice for your estate plan. It keeps your assets out of probate and can cover more complex needs than a will. Plus, trusts are more flexible and private than wills. However, if your estate is relatively small and straightforward, a will might be a more cost-effective and simpler option.
Key Takeaways:
- Wills detail the distribution of assets after death and are subject to probate.
- Trusts allow for the management and distribution of assets during your lifetime and afterward.
- There are several different types of wills and trusts; each one fulfills different types of needs.
- Wills are simpler and can be more cost-effective than trusts, depending on the size of your estate.
- Trusts are more flexible and more private than wills. They can do things that wills cannot, such as plan for incapacitation and avoid probate.
- Even if you already have a trust, a pour-over will is an important safeguard.
- Consult an estate planning lawyer to understand the best approach for your specific situation.
Consult an Arizona Estate Planning Attorney
No matter whether you think a will or a trust is right for you, it’s always a good idea to get a professional opinion. The Phelps LaClair team has been helping Arizonans create and manage sound estate plans for over 40 years. We can help you understand which documents will best cover your needs, and help you ensure that your estate planning documents are legally valid. Contact us today to schedule a free consultation at one of our many Phoenix Valley locations.
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