If you're thinking about estate planning, you've probably come across two common ways to pass along your assets: Trusts and wills.
There are big differences between these two legal tools, especially when it comes to when and how your assets are distributed.
Here's what to know about both, including who they're for and how they work.
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What is a will?
A will is a legal document you create that details how you want your assets and belongings to be distributed after you die. Wills can cover everything from who inherits your baseball card collection to who takes ownership of your house.
Generally, wills include:
- An executor: This is the person who's in charge of carrying out the will
- Beneficiaries: The people you're naming to inherit items or money.
- Guardians for children: If applicable, you'll name guardians for minor children.
"You set up this document and you sign it, but all of the work of transferring the property in line with your wishes is put off until you die," Mitch Mitchell, product counsel at estate-planning site Trust & Will. Property is then transferred to your beneficiaries through a legal process called probate.
"Probate is a court proceeding where someone is appointed by the court to be in charge of administering the estate, following the directives of the decedent's will," said Tasha Dickinson, an estate lawyer in West Palm Beach.
It's how the legal system validates your will and gives the go-ahead to the executor to begin distributing your assets.
Pros and cons of a will
- Affordability: Wills are simpler and more affordable to draft than trusts.
- Keep assets while you're alive: In a will, possessions are transferred through the probate process after you die.
- Must go through probate: Probate is a court proceeding that can take years and a lot of money.
- Easier to challenge: Because wills are part of the public record, it's easier for someone to find out they've been excluded and file a challenge.
- No protection from taxes or creditors: Assets listed in a will can be seized by creditors and are subject to inheritance tax and estate tax.
What is a living trust?
A living trust is another estate planning tool to transfer property and wealth but, while a will names beneficiaries, a trust helps you avoid probate.
"With a living trust, you transfer that property into the care of a trustee," Mitchell said. "The administrative work of the transfer is done while you're still alive so that, when you die, there's not that whole process."
That can be helpful in states like California, with drawn-out and expensive probate processes. A living trust can also be useful in complicated situations — like if the grantor had property in multiple states or is still alive but incapacitated.
Many people put real estate, non-retirement brokerage accounts and even life insurance in trusts, Mitchell said, but "any asset that can pass under a will can also pass under a trust."
There are two main types of living trusts: Revocable trusts, which can be changed during your lifetime, and irrevocable trusts, which are almost impossible to alter.
The major drawbacks of a living trust are the complexity and cost.
"If you go the traditional route of using an attorney to draft plans, they're always going to charge more for a revocable living trust because it's a bigger document," Mitchell said. "And it's more expensive for them to guide you on transferring assets."
Pros and cons of a living trust
- More privacy: The estate doesn't go through probate, so only the grantor, trustee and beneficiaries see the specifics.
- Avoids probate: Saves time and money associated with probate.
- Tax benefits: An irrevocable trust can minimize or eliminate the estate tax burden
- Protected from creditors: Assets in an irrevocable trust aren't included in the grantor's taxable income and can't be seized.
- Cost: A living trust is much more complicated, so an attorney will charge more to draft one.
- Complexity: While wills are relatively straightforward, trusts can be more complicated to set up.
- Can't be changed: An irrevocable trust is nearly impossible to alter once it's established
Living trust vs. will: Key differences
| Will | Trust | |
|---|---|---|
| Goes through probate | Yes | No |
| Enters public record | Yes | No |
| Manages assets if you can't anymore | No | Yes |
| Immediate asset tranfer | No | Yes |
| Estimated cost to set up | Up to $1,000 | Up to $3,000 |
| Estimated cost to maintain | Up to $300 | $2,500-$7,000 |
Source: Cost estimates from the National Council on Aging
Who needs an estate plan?
There are laws about who receives your estate if you don't have a will or trust, but they vary by state and don't account for your situation or wishes. Estate planning can help your loved ones avoid conflict at a difficult time.
"Everybody should have a plan," said Mitchell.
While you may want to enlist a professional, there are online programs that can create a simple will or trust: Fabric by Gerber Life generates wills for free, for example, and offers guidance on making them legally binding.
Fabric by Gerber Life
Cost
$0
App available
Yes
Standout Features
Fabric by Gerber Life offers a simple, quick way to make a will and designate your beneficiaries. Designed for parents, this online will maker allows you to appoint a guardian for children and make any final arrangements. The app walks you through the process and gives directions on how to make the will legally binding after creating it.
Pros
- Free to use
Cons
- Wills aren't state-specific
Quicken WillMaker & Trust has packages for more complicated financial situations and comes with a 30-day money-back guarantee.
Quicken WillMaker & Trust
Cost
$109 to $219 ($39 annually to update after the first year)
Estate planning options
Wills, living trusts, power of attorney, health care directives
Access to legal assistance
No
Availability
Quicken WillMaker & Trust is available nationwide except in Louisiana
Standout Features
Quicken WillMaker & Trust allows users to create wills, health care directives and living trusts, both online and through downloadable software. Its all-access plan includes a digital storage vault through Everplans.
Pros
- Produces variety of documents available, including travel documents and other helpful forms
- Downloadable software for lifetime access
- 30-day money-back guarantee
Cons
- Not available in Louisiana, U.S. territories or Canada
- Online will maker only allows free changes for the first year
- No access to attorneys
FAQs
Is a trust better than a will?
Whether a trust or a will is the right fit depends on your financial situation and specific needs. Parents with young children who want to assign a guardian want to make sure they're taken care of may prefer the ease and affordability of a will. If you have a large estate, a family business, property in multiple states or want to avoid a legal challenge, a living trust may make more sense.
What is a revocable living trust?
A revocable living trust allows the grantor the right to make changes or revoke the trust at any time. An irrevocable trust, on the other hand, can only be changed in limited circumstances with the approval of the beneficiaries.
How much does a living trust cost?
Depending on the complexity, it can cost anywhere from $3,000 to more than $10,000 to set up and maintain a living trust.
Can there be two trustees in a living trust?
Yes, you can appoint two trustees to a living trust. In some cases, having co-trustees can split the workload and alleviate family tension. In others, however, it can fuel confusion, inefficiency and resentment.
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Meet our experts
At CNBC Select, we work with experts who have specialized knowledge and authority based on relevant training and/or experience. For this story, we interviewed Mitch Mitchell, an estate planning and probate attorney who serves as product counsel at online estate planning company Trust & Will. We also spoke with Tasha Dickinson, a wills, trusts and estates lawyer and partner at Day Pitney, LLP in West Palm Beach, Florida.
Why trust CNBC Select?
At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every estate planning review is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of estate planning products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics. See our methodology for more information on how we choose the best estate planning.
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