Estate planning can be complex, as it combines the challenges inherent in managing an individual’s financial assets with the emotional challenges of navigating their final wishes before death. 

Fortunately, there is a vast range of options available for planning your estate, covering every imaginable combination of assets, beneficiaries, and liabilities.

Key Takeaways

• Trusts and wills are two different types of documents used to settle a deceased individual’s estate.
• While wills are typically simpler and cheaper to draft, a trust can offer additional benefits that may appeal to individuals with larger, more complex estates.
• When establishing a trust, you’ll need to designate whether the terms are flexible or fixed, as well as whether the trust will exist while you’re still alive or be formed after your death.
• No matter what form of estate planning you choose, it’s smart to have a plan for your assets in place long before you think it might be necessary.

What is a Will?

A will is a document that outlines how an individual wishes their estate to be handled after their death. Every will is different, but most will include some or all of the following details:

• Executor – The executor of a will is the individual responsible for carrying out the deceased individual’s wishes, also known as the decedent. The named individual is expected to ensure the terms of the will are followed as closely as possible.
• Beneficiaries – Beneficiaries are the recipients of the deceased person’s assets. This can include family members, partners, friends, or anyone else the decedent wishes.
• Terms – In addition to naming recipients of the decedent’s assets, a will should also explain how the assets will be divided and what, if any, conditional terms they wish to place on the distribution of said assets.

Not all assets need to be included in a will—many financial assets, for instance, require the owner to name beneficiaries when creating the account or other financial arrangement. A will can cover the remainder of the decedent’s assets that do not already have named beneficiaries.

Tax Implications of Wills

The tax implications of an inheritance, no matter how it is structured, can be complicated. Most estates do not reach the threshold for triggering the federal estate tax—a tax levied on the distribution of estates totalling more than $13.99 million in 2025—and only a few states have estate taxes of their own.

Inheritance taxes are also not universally applied and can vary from state to state. However, most places will levy capital gains taxes on inherited assets that have since matured and generated new wealth for their beneficiaries.

If you are unsure of your tax requirements for inherited financial assets, the IRS offers a convenient tool to determine your inheritance tax liability.

What is a Trust?

A trust is a legal and financial arrangement in which an individual, known as the grantor, entrusts the management of financial assets to a third party, known as a trustee, for the benefit of a beneficiary. While these types of arrangements are frequently used for estate planning purposes, trusts can also be utilized for other purposes. Individuals who are unable to manage their own finances or those with minor beneficiaries may also benefit from using a trust to manage their funds.

Types of Trusts

Not all trusts are the same, and which type of trust you employ in your estate planning process will largely depend on your unique financial circumstances and the beneficiaries you plan to name in the document. The following are some of the most commonly used types of trusts.

Living Trust

A living trust is created while the grantor is still alive, providing the grantor with considerable flexibility in how they would like their assets managed. In many cases, it also allows beneficiaries to avoid the often costly process of settling an estate through probate.  These trusts can be further broken down into two types of financial arrangements.

A revocable trust is an arrangement created by a living grantor that outlines the terms for dividing the grantor’s assets after their death. The trust is considered revocable if the grantor can alter or revoke the terms of the agreement. 

This type of trust is suitable for individuals who wish to transfer their assets to named beneficiaries; however, it has some drawbacks. Because the grantor still technically controls the assets while they are living, creditors may still have a valid claim to the assets if the grantor owes money or is targeted by lawsuits upon their death. 

In cases where a grantor has concerns about creditors pursuing their assets after their death, an irrevocable trust could be a better option. Once these types of trusts are established, their terms cannot be changed, making them a less flexible option than revocable trusts. The upside, however, is that they offer better asset protection from creditors who might seek to claim the grantor’s assets before they are transferred to the beneficiaries.

Testamentary Trust

Unlike living trusts, testamentary trusts are established after the grantor’s death—usually through terms outlined in the decedent’s will. While living trusts can be either revocable or irrevocable, testamentary trusts are always irrevocable, ensuring that the terms cannot be altered after the grantor is no longer able to participate in their implementation.

Testamentary trusts generally require less work on the part of the grantor and the trustee, as the document doesn’t require asset management until after the grantor’s death. They are also commonly used when the grantor wishes to distribute assets on a set schedule to minor beneficiaries or other individuals who need a more structured distribution of their assets.

The biggest drawback to this type of trust arrangement is that it doesn’t avoid the probate process in the same way certain living trusts can. Probate can be complicated and expensive in certain circumstances, so it’s important to consult with a professional before choosing which type of trust is right for you.

Charitable Trusts

Not all beneficiaries are friends and family members; in many cases, a grantor will choose to establish a trust to benefit a charitable organization. These types of trusts are always irrevocable, and can offer a variety of benefits to the grantor both during their lifetime and for their other beneficiaries after their death.

There are several tax benefits to establishing these types of trusts, and in most cases, they will generate income for both the charitable organization and other, non-charitable beneficiaries in the long term. The IRS has helpful pages on how charitable trusts work, along with their tax implications.

Special Needs Trusts

Many trusts are established to provide support to individuals who require additional assistance in managing their assets. In cases where a single, lump-sum inheritance could pose a hindrance to a given beneficiary, a special needs trust can help manage the grantor’s assets on their behalf. 

These trusts typically distribute a small portion of the assets contained in the trust to the beneficiary on a set schedule, creating a consistent income stream for them over time. Many special needs trusts are also designed to allow beneficiaries to continue receiving assistance from programs like Medicaid and Supplemental Security Income, as these trusts can be structured not to be counted toward the individual’s income level when determining eligibility for these government benefits.

Tax Implications of Trusts

The tax implications of trusts depend largely on the type of trust you establish, where you establish it, and who you name as beneficiaries. In many cases, the income received from your trust will be subject to income tax requirements for your beneficiaries. In some cases, your beneficiaries may need to pay capital gains taxes on some or all of the assets they receive.

Generally speaking, tax issues related to trusts are more complex than those involving wills. If you have questions about potential tax liabilities for your trust, Horizons Wealth Management can help guide you in the right direction. Get in touch today to learn more about financial planning, retirement planning, wealth management, and managed portfolio services.

Wills vs. Trusts: How to Choose

There is no one-size-fits-all solution for estate planning, and whether you choose a will or a trust to handle your affairs after your death will largely depend on the size and complexity of your estate, as well as the number of beneficiaries and how you wish for them to receive your assets.

Generally speaking, a will is a simpler option for managing your estate. They are cheaper to create, easy to interpret, and enable the job to be done quickly and simply for estates with uncomplicated finances and a small number of beneficiaries.

If, however, your estate is particularly large or consists of a more complicated arrangement of financial assets, it might be worth it to establish some trust. While they cost more to establish initially, trusts can help certain assets avoid the probate process. They may offer you and your beneficiaries a range of tax benefits not available to individuals managing their estate with a will.

Bottom Line

Before deciding to draft a will or form a trust, consider the size and structure of your estate. Do you know who your beneficiaries are, and how you’d like them to receive your assets? Do you anticipate creditors will come after your assets when you pass away? Are there important charities you wish to include in the distribution of your assets?

All of these questions can help guide you toward the right estate planning tools for your unique circumstances. Whether you decide to go with a will or some form of trust, having your estate plan in place can be a tremendous relief as you navigate the complicated process of allocating your assets for future generations.

Trust vs. Will FAQ

How Does Estate Planning Affect Unmarried LGBTQ+ Couples?

As with any other couple, married or otherwise, effective estate planning can help save a great deal of heartache and potential financial misfortune. Individuals do not need to be married or even in a romantic partnership to be named as a beneficiary or executor of an estate.

In certain states, the spouse of an individual who dies without any estate planning documents in place will be named the default executor. However, this convention varies from state to state. The best way to ensure your wishes are followed after you die is to establish an estate plan long before you think it might be necessary.

Are Wills or Trusts Needed If Beneficiaries Are Designated on an Account?

No, generally speaking, an account with designated beneficiaries will be distributed to those named beneficiaries regardless of what a will or trust might say to the contrary. It’s essential to ensure that the named beneficiaries across these accounts and your will or trust are consistent to avoid unnecessarily prolonging the probate process.

At What Net Worth Do I Need a Trust?

There is no hard-and-fast rule for how much money you need to have before a trust is required, although they are typically used in situations where estates have a higher net value and a larger number of assets to distribute.