Deciding Between a Trust Fund and a Will: Which One Protects Your Legacy Best?

SmartAsset: Trust Fund vs. Will for Estate Planning

Estate planning involves both trust funds and wills to help ensure the smooth transition of assets to your beneficiaries. A trust fund is a legal entity that holds and manages assets on behalf of another individual or organization. A will, on the other hand, is a legal document that directs the distribution of assets after death. Understanding the key differences between both of these tools, as well as the advantages and disadvantages, is important for effective estate planning. Here’s what you need to know.

A financial advisor can help you create an estate plan for your needs and goals.

What Is a Trust Fund?

A trust fund is a legal arrangement where a trustee holds and manages assets for the benefit of another party, known as the beneficiary. These assets can include cash, investments, real estate or other forms of property. The trust agreement details the rules and guidelines the trustee must follow when managing these assets, providing a level of control over how the assets are used even after the grantor’s death.

Various types of trust funds serve different purposes depending on the grantor’s financial and familial situation. For example, a family with a child with special needs might opt for a special needs trust to ensure long-term financial security and care for their child. A wealthy individual concerned about estate tax may establish an irrevocable trust that removes their assets from their taxable estate.

How a Will Works

A will is a legal document that expresses the wishes of an individual regarding the distribution of their property after death. This process is overseen and executed under the probate process, a judicial procedure. The right will can speed up access to assets for the beneficiaries and ensure the individual who has deceased is able to send their assets to the right parties.

Creating a will involves naming an executor, identifying beneficiaries, distributing assets and signing the document in the presence of witnesses. After the person’s death, the executor initiates the probate process to distribute the assets outlined in the will. Though more straightforward than setting up a trust, this process can be public and time-consuming, which some individuals might want to avoid.

Differences Between a Trust Fund and a Will

Trust funds and wills potentially offer various advantages under certain circumstances. A trust fund might benefit those looking to avoid probate, control assets, or protect assets from creditors. Also, it could be suitable for those needing more complex arrangements, like staggered or conditional distributions.

However, setup is often more expensive and complex. On the other hand, wills are generally simpler and less expensive to create, allow guardianship appointments for minor children and are easier for most people to understand. A financial advisor can help you make sure you cover all the bases.

Estate Planning Considerations

When planning your estate, you ought to take into account factors such as the size and complexity of your estate, your asset distribution objectives, your family’s needs and potential tax implications. How complex is your family situation? What are your goals for your assets after you’re gone? These are examples of questions that can help start you down the right path.

Is a Trust Fund Right for You?

Trust funds can be advantageous for those with large estates or complex asset distribution needs, those wanting to avoid probate or control how and when beneficiaries receive their inheritance. You might benefit from setting up trust funds for your children or grandchildren to help secure their futures.

Is a Will a Suitable Choice for You?

Wills generally suit individuals with smaller, simpler estates, those wanting to name guardians for minor children or those who prefer a straightforward and less costly estate planning tool. If you just want to make sure you match your assets to the right beneficiaries then a will might be able to do the trick for you. A financial advisor can help you decide which is best based on your priorities and circumstances.

Bottom Line

Choosing between a trust fund and a will depends on your individual circumstances, goals and needs. Both tools serve different purposes and offer different advantages, making them important components of a comprehensive estate plan. It’s crucial to understand these differences and how they align with your unique situation.

Tips for Estate Planning

One of the most important parts of estate planning is making sure that you’ve set your assets up correctly so your beneficiaries can have access while minimizing estate taxes. A financial advisor can help set up your estate plan so that your wishes are met. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
An estate planning checklist can help you get started down the path of setting up an estate plan and protecting your assets.
Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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