Compare Trusts & Last Wills

by Joseph Nicholson
Wills and trusts serve related purposes but have different features.

Wills and trusts serve related purposes but have different features.

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Although both trusts and wills are used to convey property to beneficiaries, they are two entirely different means of conveyance. Neither generally provide the person making the instrument with any tax savings, but both can create tax savings for the beneficiaries.

Last Wills

A will is a document that expresses the testator's intent to leave property to others. A will has no effect during the life of the testator. Even after death, a will is generally only given effect after being verified in a probate court. Property conveyed by a will does not become property of the beneficiaries until the debts and applicable taxes owed by the estate are paid. A will must be formed and executed according to the laws of the state in which it is created, which usually requires it to be in writing, and signed by the testator and at least two credible witnesses.

Trusts

Though, like a will, a trust is created by a signed document, unlike a will, a trust can be a separate legal entity. There are many different types of trusts, though living trusts, also called inter vivos trusts, are probably the most common. In a trust, property is owned by a trustee on behalf of the beneficiary. For federal tax purposes, including the estate tax, the undistributed income of a trust is treated like the income of the person making the trust, called the grantor. Unlike property passed through a will, the assets of a trust are not subject to probate.

Estate Tax

Neither a will nor a trust can generally prevent assets becoming subject to the estate tax. Only those trusts which meet very specific conditions can avoid being counted as part of the decedent's estate. To qualify as a "complex trust" under IRS rules, the grantor cannot retain any use or control over the assets of the trust or how they are distributed. By contrast, most grantors of living trusts name themselves as trustee or retain use of the trust property. Nevertheless, a trust can create tax benefits for beneficiaries.

Testamentary Trusts

A will can create a trust. Such testamentary trusts are created through application of the will as part of the probate process. The property assigned to the trust is managed by a trustee either named in the will or appointed by the probate court. A testamentary trust can help prevent beneficiaries from being exposed to immediate taxes on the property, and can give the testator longer term control of the property before it is conveyed to the beneficiaries.