Wills and trusts have much in common; both are tools that help a person take care of their assets after they die. However, there are significant differences between the two that make one better than the other in different circumstances and for different people.
A will is a tool that dictates where a decedent’s assets go after they die. The decedent’s assets can be split between any person or entity, including businesses or nonprofits. When the entire estate has been distributed according to the will, the will no longer has any effect and is terminated. A key aspect of a will is that the transfer of the decedent’s assets happens “immediately” upon their death. Practically, this transfer takes time, but the legal ownership transfer happens when the testator, the person who “wrote” the will, dies. The will appoints a personal representative who oversees the transfers and who handles distributing all the assets of the decedent according to their will.
Like a will, a trust is a tool to disperse of a decedent’s assets when they die. A trust, however, is a separate entity from the decedent. So, in one sense, a trust is its own person or entity. A trust owns anything that a person has transferred to the trust, and the trust can give it away over time or under certain, specific conditions. The person who creates the trust, the grantor, can also appoint themselves as the trustee, the person who runs the trust, or choose someone else. The trustee oversees everything the trust owns and has a fiduciary duty to ensure that the assets are managed and distributed according to the terms of the trust.
Unlike a will, a person, called the “grantor”, can transfer assets to their trust while they are alive, as well as through their will when they pass. The assets owned by the trust can be distributed at once upon the death of the grantor or can be held until a certain event occurs. A common example might be that a grantor can specify that their child will not receive their inheritance until they turn 25 or graduate from college. Additionally, a grantor can specify that they do not want their child to receive their inheritance all at once but divided into annual payments.
Because of how a trust is a separate entity (like a person or business) from the grantor, using a trust instead of a will can save a significant amount of money in estate taxes when distributing an estate. For example, the Minnesota estate tax threshold as of 2022 is $3 million, which means that if an estate consists of more than $3 million, anything over $3 million is taxed at the corresponding Minnesota estate tax rate, ranging from 13% to 16%. What a properly drafted trust can do is divide ownership of the estate between two entities, the person/grantor, and the trust, each being able to transfer up to the $3 million threshold without sustaining the estate tax.
Jacob Grow