Trusts and estates are both important concepts in terms of protecting assets and leaving them to family members, nonprofits and other beneficiaries after your passing.
Despite their connections, trusts and estates are very distinct from each other. There are many differences between trusts and estates, from their basic definitions to their functions.
Making a direct estate vs. trust comparison is only possible with an understanding of both concepts. Keep reading to learn more about what trusts and estates are, as well as their roles in legacy planning.
What is an Estate?
An estate is a relatively simple concept, at least foundationally. Estates represent the total net worth of an individual, accounting for all assets held.
Cornell Law School’s Legal Information Institute defines an estate as “the total property, real and personal, owned by an individual prior to distribution through a trust or will.”
The distinction between real and personal property essentially refers to real estate versus all other assets. The category of real property includes land itself as well as buildings and other improvements made to that land. Examples of personal property include stocks, bonds, currency, art, vehicles and furniture.
Estates only include personally held real and personal property. In other words, mutually owned assets—such as a home owned with a spouse—are not included.
In terms of estate planning and financial planning specifically, estates refer to all property personally held by an individual before their death. In this context, an estate exists after a person’s death to contain and distribute those assets.
Smartasset explains that these assets can be distributed either through a will or, when a will is absent, based on state law and generally through the probate court process. After addressing relevant debts and expenses, assets in an estate will be shared through one of those two processes.
What is a Trust?
A trust can be viewed as an agreement to create a legal entity to manage and distribute assets.
Ownership of those assets moves from the original owner to the trust. The person or organization managing the trust takes on a fiduciary role, protecting the assets to the benefit of the beneficiaries. The trust sets conditions that must be met for the assets to eventually transfer from the trust to its beneficiaries.
There are three types of stakeholders involved in a trust:
- The grantor. This is the person who places their assets into the trust.
- The trustee. The trustee oversees the assets in the trust. They enter into the agreement knowing that they must manage those assets in the best interests of the beneficiaries.
- The beneficiary or beneficiaries. Assuming the conditions of the trust are met, the beneficiaries receive the assets held in that trust.
As Investopedia explains, there are several types of trusts. Categories include revocable trusts (can be changed by the grantor while alive) and irrevocable trusts (difficult or impossible to change once established). A trust and estate attorney can help clients find the right options for their specific needs.
Establishing a trust allows the grantor and their beneficiaries to avoid probate court. Because the assets are held in a trust, they are no longer part of an individual’s estate.
Estate vs. Trust vs. Will
These basic definitions can help to contextualize the relationship between estates, trusts and wills.
An estate represents the assets directly held by an individual, excluding those in trusts or held with others.
Wills are legal documents that explain how an individual wants their assets distributed after their passing. Wills can help simplify the probate process and, in certain circumstances, avoid it entirely. However, many wills will need to go through probate.
Trusts are a distinct legal entity that holds assets provided by a grantor and managed by a trustee in the best interests of beneficiaries. When properly structured, trusts provide an alternative to the probate process in estate planning.
What’s the Difference Between an Estate and a Trust?
Estates and trusts play important roles in financial and legacy planning. However, they are not similar enough to be closely comparable.
Instead of considering these concepts from a “trust vs. estate" viewpoint, consider this. In legacy planning, an estate is made up of assets directly held by an individual when they pass away. A trust is a tool used to move ownership of assets and avoid the probate process that is common when someone passes away, whether they have a will or not.
Trust and estate attorneys can help clients navigate the complex legal landscape related to trusts, estates, wills and related concepts.
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