Wills and trusts.
Those are two terms that you’ll hear over and over if you’re getting into the process of estate planning.
Now, you probably already have some idea of what wills and trusts do… or you might think you do. We’ve found that people’s understanding of these estate planning documents is often vague, clouded by misperceptions and even pop culture references.
If you are trying to set up an estate plan for yourself and your family, it is crucial to get beyond these misperceptions and learn the differences between wills and trust. While we can’t discuss every nuance of wills and trusts in this article, we will go over the basic ways in which these two types of estate planning documents differ from each other.
Before going any further, it may be useful to define estate planning – the central goal which wills and trusts are designed to achieve.
Estate planning is the process of arranging what will happen to your estate after your death. Your estate includes all of your property and other assets, including real estate, bank accounts, stocks and bonds, and more.
The primary goal of estate planning is to ensure that your children and other beneficiaries receive the inheritance that you want them to receive, and under the circumstances you choose. But estate planning can serve a number of other purposes, including:
- Minimizing your estate tax burden.
- Planning for who will take care of you in the event of your incapacitation.
- Appointing a guardian for your minor children and other dependents.
What happens once you are gone will never be fully under your control, of course, but with a strong estate plan you can establish the highest possible degree of security for yourself and your family.
Wills in a Nutshell
A will is exactly what the term implies: a document in which you express your will regarding what should happen to your estate after death.
Wills involve three parties. The first of these is you. In this process, you are known as the testator. The second is your beneficiaries, the people who inherit your estate. The third is the executor, who will be charged with carrying out the terms of the will.
A will does not take effect until after you die, so once you have drafted a will, it is not final. You can change it at any time.
Trusts in a Nutshell
A trust is also what the term implies. When you create a trust, you entrust some or all of your assets to another party. Estate planning is a primary function of trusts, but unlike wills, they can be used for several other functions as well, including asset protection.
As with a will, there are three major parties involved in a trust. When you draft a trust, you are known as the settlor. You will pass the property in the trust into the care of a trustee, who will distribute these assets to the beneficiaries in accordance with the terms of the trust.
These three parties are roughly analogous to the parties involved in a will, but as we shall see, there are some differences.
A trust takes effect immediately after it is drafted, but revocable trusts, like wills, can be changed at any time before you die. Irrevocable trusts cannot be changed, but these are used for special purposes and most ordinary estate planning trusts are revocable.
Major Differences Between Wills and Trusts
The central difference between wills and trusts is that wills go through probate, while trusts do not.
Probate is a long, complicated legal process by which a will is “proved” in court. The decedent’s assets are inventoried and their expenses paid, and the terms of the will are carried out. The executor is the party who must manage all this, but they will be heavily supervised by the probate court in doing so.
If you did not write a will or a trust, then your property will still go through probate, but it will be distributed to your closest relatives according to a prearranged set of laws without your having any say in the matter.
Property placed within a trust, however, avoids probate entirely. The trustee will fulfill the terms of the trust without any direct legal oversight, and the courts will only get involved at all if the process breaks down and someone files a lawsuit. This means that the process of administering a trust will typically be simpler and involve less bureaucracy than executing the terms of a will.
Placing your property within a trust will also protect your privacy. Probate courts, like all courts, are open to the public, and so anyone will be able to see what property you owned after your death. If privacy is a major concern for you, as it is for many people, then a trust will likely be preferable to a will.
The bureaucracy of probate court does have one advantage, which is that it typically does more to ensure that the executor is following the law. Trustees have a lot less oversight and a lot more direct control over your estate than an executor does.
So, if you are going to create a trust rather than a will, you should put in place as many procedural safeguards as possible and ensure that your trustee is someone you can rely on to be competent and ethical!
If you are a parent to minor children, then one of the most important questions you will face in estate planning is the matter of who should take care of your children once you are gone.
If your children’s other parent is still alive, then they will typically receive custody. If not, however, then you will have to specify a guardian, and in order to do this you will need a will. A trust cannot be used to select a guardian for your children.
There are two types of guardianship, and these roles may be occupied by different people. Guardianships of the person involve the question of who will actually care for your children on a day-to-day basis, while guardianships of the estate involve the question of who will manage your children’s financial resources while they are still minors.
If you don’t choose a guardian, then the probate court judge will… and it may not be the guardian you would like.
You can appoint anyone you like to be guardian, including someone who is not a member of your family. Needless to say, this is a serious decision and you should take into account a wide array of concerns when deciding who will be best for your child.
In some cases, the probate court may still overrule your decision if they feel that your appointment of guardian is not in the child’s best interest, but there is no doubt that naming a guardian in the will puts you in a much stronger position than you would be otherwise.
Trusts, unlike wills, can help you avoid conservatorship.
How does this work? Well, suppose that you do not die, but become incapacitated, such as by entering a persistent vegetative state or developing severe dementia. If this happens, then the court will recognize that you are unable to care for yourself and appoint a conservator to handle your affairs.
By definition, since you will be incapacitated, you will not have a choice of conservator. The courts will choose for you, and as with the issue of guardianship, it may not be the person that you would have chosen.
A will does not take effect until after the death of the testator, so you cannot select a conservator in your will. But trusts can take effect while the settlor is still living, and so if you write a trust, you can arrange for the trustee to begin managing your assets in the event of your incapacitation. Your designation of trustee will take precedence over the court’s choice of conservator.
That said, even without a trust, you are not necessarily powerless over what will happen if you should become incapacitated. You can also create a document known as a power of attorney (POA) which will similarly designate a party of your choice to handle your affairs when you are incapacitated.
Challenging a Trust or Will
It’s possible that, after your death, your will or trust may be challenged. This is not a common occurrence, and it is difficult to successfully challenge a will or trust, but if it does happen, trusts are generally safer than wills.
There are a couple of reasons for this:
- Because there is no probate for trusts, and the proceedings are not public, there will be fewer opportunities to mount a legal challenge.
- While wills can be written once and then put aside, trusts generally involve continual involvement from the settlor, so it is harder to argue that the settlor lacked the capacity to form the trust or did so under duress, which are some of the main grounds for contesting a will or trust.
Also, wills generally need to be signed in the presence of two witnesses, while trusts do not. Failing to go through this simple procedural hurdle can lead to a challenge down the road, so if you are drafting a will, be careful!
Wills and trusts are both somewhat complicated documents, and to do them right will take some effort on your part. However, trusts generally require more effort than wills.
Wills can be drafted very easily, and you can even find forms on the internet or in books which can allow you to draft a will without an attorney’s help. We don’t recommend this method, though. You and your family deserve better than a McDonalds will, and the best wills are unique documents which are crafted with a good deal of thought and the proper advice.
Trusts, in general, tend to be harder for a few reasons:
- When you draft a will, you will not need to do anything to the property that you name in the will. But when you draft a trust, you will have to actively move your property into the trust, which involves going through all of the titles of property and changing them so that the trust is the owner.
- Trust documents are more complicated than wills. Because there is no probate, and no one supervising the trustee, you must include very specific instructions regarding the role of the trustee and what they can and cannot do.
- Amending a trust is typically more difficult than amending a will. Wills can often have amendments added without rewriting the whole thing, whereas modifying a living trust requires a much more holistic effort of rebuilding the trust from the ground up. (And irrevocable trusts can’t be modified at all.)
How Much Does a Will or Trust Cost?
As you might expect, because trusts are generally more difficult to create, they are also usually more expensive than wills.
That said, do not assume that a trust is outside of your means! Many trusts are quite affordable, and you should research all your options before making a decision. Also, estate planning is a worthwhile investment; the costs of not doing it right will ultimately be far higher.
Using Multiple Estate Planning Vehicles
Wills and trusts are not necessarily an either-or.
While you can only create one will, you are not limited to just one trust, and many estate plans involve multiple trusts that serve separate purposes. Furthermore, you can create both a will and a trust, and in many cases, this is actually the advisable option.
Even if you have a very strong trust, you will likely need a very simple will to cover all of the property not specifically named in your trust and to appoint a guardian for any minor children. In many cases, this will take the form of a pour-over will, which simply stipulates that all of your remaining property is to be moved into the trust upon your death. While simple, this step is important and should not be forgotten!
Whatever the case, estate planning always involves comprehensive and careful effort on your part, and your will and trust(s) will likely go through several revisions during your lifetime. In order that this effort does not go to waste, it is important to make your plan as strong as it can possibly be, and to this end you should get all the legal and financial help that you can in drafting a will or trust.