When I’m first sitting down with a potential client, we spend a lot of time discussing the law: what probate is, how Medicaid for long-term care works, and today’s FAQ subject, the difference between wills and trusts. We discuss how these concepts apply to their specific situation, and that discussion helps us determine what plan is right for them.
Wills and trusts are complementary tools in the estate planning toolbox, but they do not serve the same purposes. Wills are basic estate planning documents; trusts accomplish a number of advanced purposes, such as probate avoidance and asset protection. (In this post, I will be talking about simple revocable trusts that are used for probate avoidance; these trusts are the most common type used in estate planning.)
Very (very) simply put: a will does not help you to avoid probate. A trust does.
Let’s start with the basics. Black’s law dictionary defines wills and trusts as follows:
Will: A document by which a person directs his or her estate to be distributed upon death.
Trust: a property interest held by one person (the trustee) at the request of another person (the settlor) for the benefit of a third party (the beneficiary).
So what does that mean?
A will does not have any effect during your lifetime. It has the very straightforward purpose of directing who should have your assets - your house and furnishings, your bank accounts, your car - after you have died. Wills have power when they are filed with the probate court of the county where you were living when you died. The probate court appoints the person you’ve named in your will to manage this transfer and issues documents that give that person the legal authority to collect your assets. The probate court then supervises the process of transferring your assets to the people you’ve named in your will to receive them. The person who does the work of the transfer is called a executor, an administrator, or a personal representative, depending on how they are appointed and the state where the probate is taking place.
Wills do not, therefore, achieve any lifetime estate planning purposes, such as managing your assets if you are incapacitated. (Wills can be used during lifetime if you are incapacitated and have appointed a guardian for your children in your will, but I prefer to use a separate Nomination of Guardian for that purpose.)
A trust, by contrast, is a document which governs the management of property both during your life and after your death. When you establish a trust, you may put assets into that trust during your lifetime and have access to them during your lifetime in addition to using that trust to direct the distribution of your assets after you die. There are many benefits to using a trust to do this instead of a will:
- If you are incapacitated during your lifetime, your successor trustee can manage assets held in the trust for your benefit
- You can set down rules for the management of your assets if you die while your children are young, and can delay the age at which your children will receive those assets (children get control of assets left to them under a will at age 18)
- Assets held in trust do not have to go through probate administration, and can be transferred to your heirs or used for their benefit almost immediately after you die
- Trusts are private and do not have to be filed with the court, so your estate planning arrangement will not be made known to people you might not want to have access to them
So how does this look in practice? I’ve made a few charts showing how an estate is distributed using a will and using a trust. Keep in mind that, even if you have a trust, you should also have a “pour-over will” so that any assets you have not put into your trust during your lifetime will be “poured over” into the trust by probating your will. (With all these trusts, the settlor- the person who establishes the trust- can act as trustee- the person who manages the trust- during their lifetime, and can also be the sole beneficiary- the person who gets the benefit of the assets held in the trust. Trusts can be very flexible.)