A Will Versus a Trust: What’s the Difference?
Wills and trusts are both estate planning tools that can help ensure your money and property are protected and distributed to your designated beneficiaries according to your wishes. It is common to have both a Will and a Trust as part of a comprehensive estate plan.
In a nutshell: A Will is a written document that directs what happens to your property after your passing, whether you plan to leave everything to your children, favorite charities, and/or your alma mater.
A Trust does the same thing as a Will: A Trust directs what happens to your property after you die. The main difference between a Will and a Trust is that a Will only comes into effect after one's death, whereas a Trust becomes active the day you create it. Put another way, Trusts allow for both pre and post-death planning.
There are irrevocable trusts, often created for tax purposes, which generally cannot be altered after their creation, and then there are living trusts, which can be changed by the grantor during their lifetime.
All Wills must go through a legal process called Probate. Probate, put simply, is the public, Court-overseen process concerning the re-titling and re-distribution of one's assets after they die. This process can be lengthy and potentially contentious if family members contest the Will, not even considering the attorney fees associated with handling a probate matter. Trusts, when prepared and maintained properly, are not required to go through Probate when the Grantor dies, and Trust Administration is generally much cheaper to accomplish than proceeding with a Probate case, and may be able to be accomplished with minimal, if any, attorney involvement to get your property where you want it to go.
For this blog, we will look at how these estate planning tools can be used to provide Peace of Mind for you and your loved ones, including:
Whether you need a will, a trust, or both
The different types of trusts
The advantages and disadvantages of wills and trusts
KEY TAKEAWAYS
Whether you choose a will or a trust, you should seek professional advisors' advice (tax, investment, and legal).
A Will is a legal document that spells out how you want your affairs handled and assets distributed after you die.
A Trust is a fiduciary relationship in which a trustor gives a trustee the right to hold title to property or assets for the benefit of a third-party.
Trusts offer more control of assets, but they are more expensive, tedious to set up, and actively managed.
If you do not have an estate-transfer plan, the state you live in and the federal government will have one for you.
Wills
The most common type of will is called a testamentary will. It is a legally enforceable document stating how you want your affairs handled and assets distributed after you die. It can also include a directive of how you want your funeral or memorial held. A Will is an important component of estate planning. Other less frequently used types of wills include holographic wills, oral wills, and pour-over wills.
With a Will-based estate plan, your estate will become part of the public record, and anything left by a Will must go through probate court. As mentioned above, probate attorneys can be a very expensive aspect of proceeding through probate. However, certain assets, like Retirement accounts and life insurance policies, are able to pass straight to named beneficiaries and do not have to go through the probate process.
If you die, without a Will—called “intestate”—the State of Nebraska has already decided what happens to your property, bank accounts, securities, assets, and even the guardianship of your minor children will be determined based on State intestacy laws. It can lead to long court battles and financial hardship for your loved ones.
Guardianship of Minor/Special Needs Dependents
If you have minor-aged children at home, or if you care for any dependents that have special needs, it's important to have a will that directs who you want to be appointed as guardian of your children and/or dependents. If a guardian is not appointed at the time of death by a written instrument, your surviving family will have to seek help in a probate court to have a guardian appointed for your children, which is a time-consuming and expensive process.
Not to mention, the person appointed by the Court may not be one whom you would have wanted to be entrusted with your kids.
If you have minor children, or dependents that you care for with special needs, it is imperative that you have the proper documentation in place to ensure that your minor children are cared by individuals whom you trust, as opposed to leaving who will fill your shoes in the event of your untimely passing up to a Court that has little to no insight into your particularsituation.
What if I Die Without a Will?
If you die without a will, called ”intestate,” the State of Nebraska gets involved, and the State will oversee the distribution of your assets based on laws that have already been established for this purpose. If you have minor children and die intestate, the Court will appoint a guardian for your children, and will have to do so based on whatever evidence is presented to it. Thus, it is always best to have an estate plan in place so that your wishes are known in advance, making things easier for the Court and for your loved ones.
Trusts
A trust is another method of estate transfer—a fiduciary relationship in which you give another party authority to handle your assets for the benefit of a third party: your beneficiaries.
A trust can be created for a variety of functions, and there are many types of trusts. Overall, however, there are two categories: living and testamentary.
A will can be used to create a testamentary trust. You can also create a trust for the primary purpose of avoiding probate court, called a revocable living trust.
Testamentary Trust
Simply put, this is a trust that is included WITHIN your Will, and does not become operative until you have passed. Trusts tend to be more expensive than wills to create and maintain, so a testamentary trust may be a reasonable option. A trustee will be named in the document to control the assets' distribution following the trustor's wishes, following the trust document and its mandates. This is also an effective way to control the passing of your estate beyond the grave.
Living Trust
Like a will, a trust will require you to transfer property after death to loved ones. It is called a living trust because it is created while the property owner, or trustor, is alive. It is revocable, as it may be changed during the life of the trustor. The trustor maintains ownership of the property held by the trust while the trustor is alive.
The trust becomes operational at the trustor's death. Unlike a will, a living trust passes property OUTSIDE of probate court. There are no court or attorney fees after the trust is established, and your property can be passed almost immediately to your named beneficiaries.
Special Considerations
Trusts Could Keep Your Heirs Out of Probate Court
One-stop you should try to avoid on the estate-transfer train is probate court. This is where your heirs could spend months sorting out your estate if your transfer plans are not efficiently laid out. You could easily lose an additional 2-4% of your estate due to attorney fees and court costs.
Probate court is the judicial system section responsible for settling wills, trusts, conservatorships, and guardianships. After death, this court might examine your testamentary will, appoint guardians for minor children, select will executors, and sometimes set up trusts for your survivors.
If you have a will or trust in place at the time of your passing, if a probate court has to get involved, your plan provides some much needed, and much appreciated, directions to a judge who otherwise likely knows nothing about your wants and desires. If you don't have a plan in place, the Court has to figure things out on its own, based on whatever information is able to be provided to the Court during the probate process.
Your executor would still be responsible for sorting out the estate, which could take 6 to 18 months, depending on the intricacies. Imagine your eldest child spending the next year-and-a-half following your passing traveling back and forth to court hearings when they should be grieving. It doesn't sound fun, but it's a possibility if you haven't left clear and well-drawn will and/or trust documents.
Key Differences Between Wills and Trusts
Wills and trusts are both important estate-planning tools, but they differ in important ways.
First, a trust is activated when the grantor signs it. A will does not go into effect until the testator. Upon your death, your will goes through probate, and a trust does not. A will is where you name guardianship of any minor children, plus share any funeral or memorial plans or requests.
Wills and Trusts FAQs
What is Better: A Will, or a Trust?
A trust will streamline the process of transferring an estate after you die while avoiding a lengthy and potentially costly period of probate. However, if you have minor children, creating a will that names a guardian is critical to protecting both the minors and any inheritance they are intended to receive. Deciding between a will or a trust is a personal choice, and depends greatly upon your particular planning goals. A will is typically less expensive and easier to set up than a trust, however, a trust allows for additional planning options that may be of great benefit to protecting your legacy.
Do You Need Both a Trust and a Will?
Nearly everyone should have a will, but not everyone likely needs a living or irrevocable trust. If you have a trust-based estate plan, your plan should include what is called a pour-over will. In order for a trust-based plan to function as you intend, assets have to be re-titled in the name of your trust, called “trust funding.” In the event that an asset is not re-titled into the name of a person's trust while they are living, a pour-over will acts as a way to direct that any “unfunded” assets that may be left outside of your trust at the time of your passing be passed through your trust according to the trust's terms. The unfortunate part of this process is that if assets are not properly funded during life requiring the use of a pour-over will, the probate court is going to have to be involved for those assets that need to be re-titled into the name of your trust. As such, it is imperative that if you utilize a trust-based estate plan you ensure that any assets you have are appropriately “funded” into your trust in order to avoid involving the probate court, which good trust planning is aiming to avoid entirely.
Does a Will Override a Living Trust?
A will and a living trust are two separate legal documents. One doesn't usually trump another, but if the issue arises, a living trust will most likely override a will because of the terms of the trust, and as a trust is its own entity.
How Much Does it Cost to Set Up a Trust?
This is likely one of the most importation considerations you may have when trying to decide what kind of estate plan you wish to have in effect. The cost to set up a trust depends on various factors, including the type of trust needed, what kind of property you own, and the complexity of the various estate planning strategies utilized to achieve your particular goals. Clinch Law Firm, LLC provides open, up-front pricing for its estate planning services, most of which are based on flat fees, so you should expect to know exactly what you will be paying for a plan when you walk out the door after an initial planning meeting.
The Bottom Line:
It is important to settle your affairs earlier rather than later in life. A will or a trust—or both—can ensure your possessions end up where you want them to go. If you have minor children, you should absolutely make a will to name guardian for your children. A trust will streamline your estate's transfer, unlike a will, which goes through probate. Making a plan now can save money and precious time later, and help your loved ones avoid potential financial hardship. Estate planning, when done correctly, is all about providing you and your loved ones with Peace of Mind.
Contact Clinch Law Firm, LLC today to help protect your legacy that you have worked so he'd to achieve.
