Wills or Trusts? What's the difference?
Everyone has heard of wills. They come up in movies, popular media (particularly when a notable celebrity passes away without one), and in conversation. Fewer people have heard of trusts. Often, trusts are associated incorrectly with the idea of trust fund babies. This may lead people to think that trusts are only for the extremely wealthy. Many articles written on wills, trusts, and Estate Planning often presume that the reader knows the basics of these vital documents. In reality many of us don’t.
Let’s be frank: if you are not an Estate Planning Attorney, this all can seem like overwhelming gibberish. So, if you feel confused about wills and trusts, please don’t be embarrassed because this is very normal. The goal of this post is to outline the differences between wills and trusts, the way they work and the practical impacts.
What’s a will?
A will is a written document memorializing your wishes that is signed by you and witnessed by two non-related parties. A will is considered a "death" document because nothing happens until you pass away.
indicates your wishes for how the assets you own are distributed
sends assets in your individual name or payable to your estate through the probate court process
details who you would want to act as guardians for your minor children if something happens to you before they turn 18 years old
names the executor/personal representative, who is the person you wrap up your estate and distribute your assets
can be changed during your lifetime by making a new version
tends to cost less than a trust at the time of execution, but costs more to settle during probate court proceedings after death
What is a trust?
A trust is a legal document that dictates what happens to your trust assets during your lifetime and beyond, which is signed and notarized. The trust is effective during your lifetime, during any period of incapacity, and after death. Because the trust takes effect during your lifetime and you can amend it, it’s referred to as a "living" document.
has lifetime benefits
details who you want to receive your assets, when they inherit, and what terms apply (a good attorney will also put in provisions about what happens to your assets if your beneficiaries have already passed away too because a good plan addresses several scenarios based on your wishes)
can be structured in different ways, depending on your family dynamics and wishes
avoids probate if fully funded (it is important that you take the process of funding the trust very seriously and work with your attorney on this should you have questions)
provides for a successor trustee to manage your assets and financial affairs upon your death or incapacity
allows for the management of your property – even if you’re incapacitated
often offers tax benefits to your beneficiaries upon your passing when they inherit
permits you to revoke or amend your wishes during your lifetime
costs more than a simple will on the outset but much less upon administration, while typically providing significantly more control for you on how your estate is handled and less stress for those managing the estate
The Probate Process: A Key Element in Deciding Between a Will and Trust
One key in deciding between a will and a trust is understanding the probate process. The term “probate” – which literally means “proving” – refers to the process when someone's will must be authenticated, outstanding legitimate debts paid off, and assets transferred to the beneficiaries. This is a court supervised process where the family works with a judge and often an attorney, to determine how the assets will be distributed.
One big negative is that probate can take a long time, even years, depending on how busy the probate court docket is, if there’s conflict within the family, or if the estate is complicated. The probate process can be expensive (right now in California, court costs and attorney fees can be around 4% of the estate!) and funds are essentially frozen until the judgment has been finalized. The entire process is public record, meaning that anyone could go to the court to search the records, find out about the family situation, what the survivors inherited, and this is almost always more information than people would like available to the public.
Another big issue is that if the probate process is necessary and your children are still minors, a custodian or guardian would need to be appointed to handle your children’s expenses. Even more drastic though is that your children would inherit their entire shares when they turn eighteen years old. For many, eighteen years old is an age they feel is far too young for their children to be making sound financial decisions.
Probate Guaranteed with a Will. If you use a will as your primary estate planning tool, you own property in your individual name, or property is made payable to your estate, probate is almost always unavoidable. In California, the threshold for probate being invoked is $150,000 of assets subject to probate; this includes real estate, bank accounts, etc.
Probate Avoided with a Trust. If you use a fully-funded trust as your estate planning tool, probate is avoided - keeping your family from stressing out about a court process. The trust acts as a manual for what your trustee needs to do and only the involved parties need to know the terms of the trust, protecting your family’s privacy. (Note: When you have a trust, you do still need a will to establish guardianship and to “pour over” assets to the trust.)
So, what does this mean?
As everyone’s situation is different, it’s important to consider your family dynamics, financial goals, and personal wishes so that you can determine what’s right for you and whether probate avoidance, incapacity planning, and trust protections are important to you and those you love. Most clients receive the greatest overall benefit and peace of mind from having a trust.
What do I do now?
Sometimes, people wonder whether to go the DIY or the online routes. PLEASE speak to a competent and caring attorney who takes the time to get to know you, your needs, and your wishes. We have too many clients who didn’t take the process seriously the first time and came to the firm to redo everything and make sure this time it’s done well. Here is an example of one couple’s experience with Estate Planning the second time around. We also have heard of too many cases where people’s DIY or boilerplate plans did not work…and it was too late for the family to avoid a messy probate process.
Without an estate plan in place, you and your family are left completely unprotected should you become incapacitated or pass away. Make sure to speak to an Estate Planning attorney who takes the time to understand your needs, outlines your options, and answers all your questions, even the ones you didn’t know you had. You don’t know what you don’t know and your Estate Plan needs to be comprehensive so you can be assured that it will work.