Welcome to Where There’s a Will Wednesday! This is the Estate Planning Blog from Forrest Law Center. Every Wednesday we will post new articles here about Estate Planning. For our first post, we will cover one of the most basic questions people ask about estate planning: What is the difference between a will and a trust?
Most people think of Wills when the topic of estate planning comes up. Indeed, wills have been the most popular method of documenting an estate plan for hundreds of years. What many people don’t realize is that passing assets by will often requires someone to go to court after your death in order to transfer legal ownership of assets to your beneficiaries – a process that can take years to finalize and thousands of dollars in court costs to finalize.
In contrast, another popular estate planning option – the revocable living trust – allows you to efficiently and privately pass on inheritances to family members, loved ones, and charities of your choosing.
Determining whether a will or a trust is best for you depends entirely on your personal circumstances and priorities. And the fact that estate planning options and strategies continue to change year to year makes choosing the right tool for the job even more complex.
To help you get a grasp of the fundamentals of both wills and trusts, here are some of their key differences:
What are Wills and Trusts?
A will is a document that directs the disposition of your assets after you die. In a will, you can nominate someone (called the Executor) to perform the work of paying off your creditors and ensuring the smooth transfer of assets to the right parties. You also have a limited ability to set conditions on when and how your beneficiaries get their inheritance (many people choose to withhold an inheritance until a beneficiary reaches a certain age or require that the inheritance be used for a specific purpose such as education).
A revocable living trust is a document in which you can direct the management and disposition of your assets during your life and after your death. Just like a will, you nominate someone (called the Trustee) to perform the work of managing your assets. Unlike a will, the revocable living trust can be set up with nearly unlimited options for how and when your assets pass on to beneficiaries.
When do Wills and Trusts take effect?
Although you might sign a will and continue to live for many, many years afterwards, a will does not take effect until you die. What’s more, the things that you direct to happen in your will may not take effect until after someone takes the will and probates it in court (probate is the process of convincing the court that your will is authentic and valid). Because you can change your will as many times as you want before you die – even revoke having a will entirely – the probate process doesn’t even start until after your death.
A revocable living trust takes effect as soon as you sign it and fund it. Because this trust takes effect during your lifetime, it provides you with additional flexibility for the management of your assets during your life which a will simple cannot do.
What part of the estate is covered by a Will and a Trust?
A will is effective for any property that is part of your “probate estate.” The probate estate is all of the property that you owned at the time you died unless it was owned jointly with someone else with survivorship provisions or it had a transfer on death or beneficiary designation. Jointly-owned property with survivorship provisions become the property of the surviving owner and property with TOD or beneficiary designations get transferred automatically to the named beneficiary.
A revocable living trust covers any and all property that gets transferred into the trust. One of the most important parts of creating a trust as part of an estate plan to ensure that your trust gets properly funded – meaning that your assets get transferred into your trust. Some assets (such as IRAs and 401Ks) cannot be put into the trust during your life. In these situations, you would likely name the trust as the beneficiary to the account.
Unfortunately, many people create trusts without properly funding them – even people who paid attorneys lots of money to set up a trust. Unfortunately, an unfunded trust is an ineffective trust. You can put all the time and effort into carefully crafting the perfect document, but without funding it’s just a bunch of words printed on paper.
How are Wills and Trusts administered?
In order for assets covered by a will to be transferred to a beneficiary, the will must first be probated in court. For many estates, someone must also be appointed as executor or personal representative and go through the formal probate administration. This means making and filing an inventory, keeping track of every transaction and filing an accounting, ensuring the payment of all debts and securing signed and notarized receipts from every beneficiary. The court supervises the entire process (through the court-appointed Commissioner of Accounts) and can punish the administrator for the slightest mistake. In addition, the administration process will easily cost thousands of dollars in court fees, plus thousands more in attorney and administrator fees. It is not unreasonable to expect a probate estate valued at $300,000 to be charged over $16,000 in court and administration fees, or a probate estate valued at $500,000 to be charged over $25,000 in fees!
In order for a trust to be effective in administering assets, the assets must first be titled into the trust. After that, the person named as trustee in the trust document follows the instructions set forth in the trust document to ensure that the assets are well-managed according to the trust creator’s wishes. There is no court supervision of the trust administration (unless a beneficiary believes that the trustee is not doing his or her job as trustee), so therefore there are no court fees. While a trustee may be allowed to take compensation for serving as trustee, those fees are much lower than the fees that an executor under a will can take.
A trust may be an important part of your estate plan depending on your objectives. Trusts require more upfront time, effort, and money to set up correctly. However, the added benefits of a trust discussed in this article may save your family time, effort, and money later and provide you with greater peace of mind during your life knowing that the hard work has already been done. As always, Forrest Law Center PLLC recommends that any person consult with a trained professional when making significant estate planning decisions.
Disclaimer: This article is for informational purposes only and not intended as legal advice or to create an attorney-client relationship. Every situation is unique and consultation with an attorney is required before any specific advice can be given.