Estate Planning Essentials: What are Wills & Trusts?
Do you understand the difference between wills and trusts? In this third video in our Estate Planning Essentials series, attorney Nic Grimwood outlines the key differences in how these two documents operate.
What are wills and trusts?
A will is a formal legal document (governed by state procedural rules) with generally at least three primary purposes: (1) distributing your assets to specific people after you become deceased; (2) determining who will be representing your estate (as the "executor"); and (3) designating guardianship over minor children. Unfortunately, there are several drawbacks to relying on will exclusively to accomplish these goals. The most significant drawback is the probate process.
The probate process is overseen by the court system and it is designed to transfer property out of your name (after you pass away) and into the names of your heirs. Regardless of whether you have a will or not, your estate will generally be required to go through this process. The advantage to having a will in probate (instead of not having one at all) is that your will tells the judge who you would like to have your assets, who you would like to serve as representative of your estate and who you have designated as guardian of your minor children (as opposed to the judge just following what state law says). Unfortunately, probate is expensive, open to the public and time-consuming. In most circumstances for most ordinary families, if both spouses become deceased, the probate process will take at least six months to a year (or more) and will be very costly (for example, in Missouri, probating an estate worth $200,000 will cost approximately $6,000 in attorneys fees alone).
In addition to probate, another drawback to relying exclusively on a will is it doesn't generally accommodate minor children very well (as far as distributions go). It can designate guardianship, but if a child is under the age of 18, there are certain restrictions on when that child can receive his or her inheritance. That being the case, it creates some complexity in the probate court system as to how that property can be held for the benefit of children who are under the age of 18.
An alternative to using a will is to use a simple revocable living trust. The concept of a trust is not as complicated as many people might assume. Most commonly, a trust is designed to be the record owner of your property so that if something happens to you, probate can be avoided. This is accomplished because nothing is technically in your name (it's in the trust's name, and the trust can't die). Of course, you control the trust (and everything it owns) as long as you're alive and have capacity.
So how does that work?
Imagine that the trust is a bucket. You put everything that you own into that bucket. You also put some instructions in the bucket for someone else to follow if you're not around. While you're alive, you can put things into your bucket or take them out at your option, whenever you want and without having to get anyone's permission. Once you pass away, the person you've designated as your successor is responsible to follow the instructions you left in the bucket (as to who gets what, how the children are cared for, etc.), including how to take care of your children.
One of the biggest advantages to implementing a trust into your estate plan is that it allows you to avoid probate. Additionally, anything that the trust owns can be transferred as quickly as needed by your successor trustee (there's no waiting period like would be required in probate). Once the trust is set up, it more or less exists invisibly in the background while you're alive. It doesn't control you or what you do with your property. It's primary purpose is to kick in when something happens to you.
Over recent years, the use of a simple revocable trust has become increasingly popular. While wills still have a very important function, it's not necessarily always the best idea just to rely on will. Sometimes a combination of the two is the best option, but it depends on your individual circumstances.
If you have any questions about wills, trusts or other estate planning matters, we encourage you to reach out to our office to speak with one of our attorneys. We'd love to come alongside you and help you build the plan you and your loved ones deserve.
Disclaimer: This article is intended for informational purposes only and is not intended to be construed as legal advice. The choice of a lawyer is an important decision and should not be based solely upon advertisements.