A few weeks ago in this space, my colleague discussed ten reasons you should consider putting an estate plan in place. In that post (well worth a read), he discussed the two foundations of any estate plan – wills and trusts. When considering putting your estate plan in place and when speaking with your estate planning attorney, it is important to understand the difference between the two documents and the reasons for considering one over the other. The starting point is to understand the terminology. In simple terms, a will is a vehicle for transferring your assets after your death. A trust, on the other hand, is a vehicle by which you can transfer your assets during your life.
A typical will provides for the payment of your debts, funeral, and burial expenses; provides for “specific bequests,” which are gifts of either a set amount of money or a particular piece of property, like family heirlooms, to specific individuals; provides for the disposition of your residuary estate after debts and specific bequests are satisfied; names an “executor” to administer your estate through probate and make the distributions to your legatees; and, in the case of minor children, nominate a guardian, who can be, but is not required to be, the same person as your executor. Any property passing under a will is required to go through probate, which essentially means that a court overseas the payment of your debts, the valuation of your assets, the fees and expenses of administering the estate, and the ultimate distribution to your legatees. The type of probate administration required, and the length of time necessary to complete estate administration, is affected by the total value of your probate estate, whether you are survived by a spouse and children, and the types of assets in your estate.
While there are many different types of trusts that are appropriate in various situations, most individuals and couples using a trust in their estate plan have what is called a “revocable living trust,” and that is the type of trust discussed in this article. The person establishing the trust is called the “grantor” or “settlor.” With a revocable trust, the grantor retains the right to amend or revoke the trust any time during his or her lifetime. Typically, the grantor also serves as the initial trustee of the trust. The grantor transfers personal assets to himself or herself as the “trustee” of the trust. The grantor/trustee then continues to manage day to day affairs much as he or she did before. If the grantor becomes incapacitated, a successor trustee is designated to manage the trust assets and use them for the benefit of the grantor. Upon the grantor’s death, the successor trustee distributes the assets remaining in the trust pursuant to the trust’s terms, which could include holding the assets in trust for the beneficiaries or distributing the assets outright to those beneficiaries. As with a will, these distributions can include specific gifts of money or property with a residual gift of the remaining assets.
Married couples can either have separate trusts for each spouse, or they can use a joint revocable living trust. With a joint revocable trust, each spouse is considered a grantor, and, typically, each spouse also acts as a co-trustee. As with a trust for an individual, after the assets are transferred, the couple manages their day to day affairs much as they did before. If either grantor becomes incapacitated, the other spouse can continue as trustee, using the trust assets to care for the incapacitated spouse and continuing to manage his or her day to day affairs. If both spouses become incapacitated, as with an individual trust, a successor trustee is designated to manage the assets and use them for the benefit of the grantors. Upon the death of the first grantor, the trust continues for the surviving spouse, who, typically, also retains the right to amend or revoke the trust. After the death of the surviving spouse, the successor trustee distributes the remaining trust assets according to the terms of the trust.
Many people think trusts are only needed by wealthy families for tax planning purposes. In fact, with the current status of the estate tax laws, only the wealthiest individuals need to consider a trust for tax minimization. However, as my colleague mentioned, tax laws can – and do – change, and a trust can build in flexibility to allow for future changes in the estate tax laws. Further, while tax minimization is certainly one function of trusts, there are many reasons to choose a trust over a will.
For example, when properly implemented, trusts simplify the transfer of assets after your death and avoid the dreaded probate. By avoiding probate, trusts ensure privacy regarding the division of your assets after your death. Trusts also allow you to retain assets in trust for young adults beyond the age of 21, something that cannot be done with an ordinary will. Families with children with developmental disabilities who receive government benefits should also consider a special type of trust called a special needs trust, designed to provide support for the disabled loved one while still qualifying the individual for government benefits. While a trust may cost a little more to establish than a will, trusts often save significant money on the back end, by avoiding the costs, fees, and expenses associated with probate. In short, there are many reasons why a trust might be appropriate, and it is important to discuss the advantages and disadvantages of a will versus a trust with your estate planning attorney.
Finally, a question I frequently hear is, “If I have a trust, do I still need a will?” The short answer is, “Yes.” First, if you have minor children, a will is required to nominate a guardian. In addition, the number one reason trusts fail is that people fail to transfer their assets to the trust during their lifetimes. In order to capture any assets that were not transferred during life, individuals using a trust in their estate plan have what is called a “pour-over will.” The purpose of this type of will is just what its name implies: to pour your assets into your trust after your death. Unfortunately, any assets not transferred during life and transferred to the trust via a pour-over will must go through the probate process, defeating one of the main reasons for using a trust in the first place. Proper funding of your trust during your lifetime will minimize the need for probate after your death. Therefore, it is important to discuss with your estate planning attorney the types of assets you own and how to transfer them to your trust.
Whether a simple will or a trust is preferable is unique to each individual. Having an understanding of the functions of the two documents will help you discuss the options with your estate planning attorney and select the best fit for you.
* This is an advertisement. The information provided here is for informational purposes only and should not be considered legal advice. You should consult an attorney for legal advice regarding your particular situation.