Wills vs. Trusts: Which Do I Need?

INTRODUCTION

Estate planning is a common topic we discuss with clients in Texas.

Clients often ask us whether a trust is appropriate for their situation. The answer depends on what you are looking to accomplish, and is typically more complex than using one tool or the other. Most importantly, your will, trust terms, account titling, beneficiary designations, and tax plan should all point in the same direction based on the goals you outline during the estate planning process.

This post walks through the difference between a will and a trust, what each one does, and when one starts to make more sense than the other. While we do not draft estate planning documents or provide legal advice, we help clients coordinate the financial pieces of the estate plan and work alongside their estate planning attorney. We hope that by the end of this post, you’ll have enough detail to get an idea of your options.

Wills & Trusts: What Do They Do?

A will directs how your probate assets pass at death. It can name guardians for minor children, name an executor, and provide instructions for property that does not already pass by beneficiary designation, survivorship arrangement, transfer-on-death designation, or trust. Retirement accounts, life insurance, and annuities pass by contract directly to the named person, bypassing the will.In a trust, one person holds and manages property for the benefit of another. A simple way to remember how a trust operates is to recognize the three parties of a trust:

Grantor: the person who creates it
Trustee: the person who manages it
Beneficiary: the person it benefits

A living trust can be set up while you’re alive. Testamentary trusts can be created through your will and only activate upon your passing.

Why Estate Planning Coordination Matters

For Texas families, the differences between a will and a trust come down to a few factors, which we’ll explore below:

Probate

When you only have a will, your estate will go through probate. Probate is defined as the court process of validating the will.

Texas often allows independent administration, a comparatively streamlined probate process with limited court supervision after the executor is appointed. That does not mean probate is irrelevant, but in Texas, it is often less burdensome than in many other states. While the Texas probate process takes time, going through probate isn’t a disaster. A properly funded living trust avoids probate for the assets held in, or properly directed to, the trust.

Timing

A will doesn’t do anything until your passing.

In contrast, a living trust takes effect once it’s signed and funded. Living trusts may help with incapacity planning because it remains in effect during your lifetime. A properly drafted and funded trust means a successor trustee may be able to manage trust assets if you become incapacitated. Living trusts will only handle assets that you have placed in them.

Control

If you would like to control how your assets are handled after your passing, testamentary and living trusts can be appealing options.

Properly drafted trusts may provide a measure of protection from a beneficiary’s creditors, divorce claims, or poor financial decisions, especially when it includes discretionary distribution and spendthrift provisions. That protection is not automatic and depends heavily on the trust terms and how distributions are handled.

Which One Do You Actually Need?

In the state of Texas, a will and the right beneficiary designations should be sufficient to accomplish the goals of most families. Wills are flexible, can include trust language that activates when needed, and can be amended over time.

Trusts make more sense in a few situations:

Blended Families

Blended families in which you want to take care of a spouse but also direct assets to children from a prior relationship are a common use for a trust. A QTIP trust (found in both testamentary wills and living trusts) is often used in blended-family planning to provide for a surviving spouse while controlling the disposition of remaining assets after that spouse’s death.

Special Needs

One area where we’ve worked with clients to establish trusts involves children or grandchildren with special needs. The benefit of these trusts is that they help preserve eligibility for government benefits while allowing trust assets to supplement those benefits.

Revocable Living Trusts

We often see revocable living trusts used to avoid probate, maintain privacy, or plan for incapacity. When clients use these trusts, the grantor retains control during life, and the trust’s language can be amended.

Irrevocable Trusts

Irrevocable trusts are more often used for estate-tax planning, creditor protection, Medicaid planning, or special-needs planning. Once assets are transferred, grantors usually give up significant control.

CONCLUSION

The right estate planning structure depends on your family, assets, wishes, and what you want to protect against. The goal of estate planning coordination is to ensure that your will, trust language, beneficiary designations, and account titling work together as intended.

If you’re trying to figure out where to start, the first step is a conversation. We’re happy to walk through what would fit your situation and help coordinate with an estate planning attorney from there.