No one wants to think about dying, but it is something everyone must face. It is important to have an estate plan in place when you pass away. There are some common documents that everyone should have as part of their estate plan. This includes a Last Will and Testament, a Power of Attorney, a Health Care Proxy, and a Living Will. Some people also choose to have a Trust as part of their estate plan as well. However, many people often confuse a trust and a will. Do you know the differences?
Last Will and Testament
A Last Will and Testament is a document everyone should have. This document outlines how a person wants their assets divided after he/she passes away. With a Will, you remain in control of how your property will be divided. In a Will a person (known as a testator or testatrix) lists who will inherit his/her property after he/she dies. It is not uncommon to leave property to your spouse and/or your children. However you can also include “specific bequests” to give certain pieces of property, such as a specific piece of jewelry, a baseball card collection, and so on, to a specific person. Otherwise, a Will typically just names certain people, or certain groups of people (such as your children or your siblings) to inherit your property.
In a Will you also name a Personal Representative (formally known as an Executor or Executrix) to carry out your wishes under your Will. This can be anyone you choose from a relative, friend, or an attorney, to administer your Will.
If you still have minor children, you can also nominate a guardian, who is someone who will care for your children after you pass away.
With a Will, it clearly states what your wishes are, and the Personal Representative is required to carry out those wishes on your behalf.
If you do not have a Will, then you are considered to die “intestate” which means you did not have a Will at the time you passed away. In that case, the law dictates how your property will be distributed after your death. In these circumstances, your property will be distributed to the following people, in this order:
- Your spouse;
- Your children (if your spouse is deceased or if you don’t have a spouse);
- Your parents (if you don’t have a spouse and/or children); and then
- Your siblings.
The advantage to a Will is you can circumvent this order and decide who will inherit your property.
If you have a Will, you may or may not be able to avoid the probate process, as well. Depending on what assets you have, the Will may be sufficient to have your property divided amongst your heirs. However, even if you do have a Will, and you do have to go through the probate process, your Will will outline how your property will be divided amongst your heirs, and you can avoid the process of intestate distribution.
Trusts are common, but not as common as a Will. People often confuse Wills and Trusts. A Will is a document everyone should have, so they do not die intestate. A Trust, however, is an optional document that not everyone has. With a Trust, you can put any property you want in the Trust, such as real estate, investments, life insurance, and more, to be held in Trust for the benefit of any beneficiaries of the Trust.
A person who creates a Trust is known as a “donor” or “grantor,” unlike a Will, where that person is known as the “testator” or “testatrix”. A Trust can be created by a donor or grantor while he/she is still alive, and the Trust can begin operating immediately.
Then the person who administers the Trust is known as a “trustee.” Similar to a Personal Representative of a Will, a trustee carries out the terms of the Trust, but he/she is also responsible for managing any assets or property held by the Trust. Depending on the type of Trust created, the grantor/donor can also be the trustee.
Under a Trust, there are beneficiaries. These are like heirs under a will, but these people will have an interest in the Trust as soon as the Trust is created. Beneficiaries do not have to wait for someone to die to acquire their interest in the Trust. It is not uncommon for the donor/grantor to also be a beneficiary under a Trust for so long as the donor/grantor is alive.
Trusts can be revocable and irrevocable. For a revocable Trust, this means that the grantor/donor can modify or terminate the Trust for so long as he/she is alive. Thereafter, the trustee and/or the beneficiaries can modify or terminate the Trust. For irrevocable Trusts, the Trusts are much more restrictive and cannot necessarily be modified or terminated after they are created. Depending on what a donor/grantor needs a Trust for, the Trust may be revocable or irrevocable.
There are many reasons to create a Trust. One most common reason is that any property held by a Trust does not go through the probate process after someone dies. In the eyes of the law, at Trust is considered its own human being, and thus the Trust owns any property in the Trust, and not the grantor/donor or the beneficiaries. This may seem like splitting hairs, but the benefit is that since an individual does not own the property—the Trust owns the property– then the property does not have to be divided through the probate process. This also means that any property held in a Trust passes outside of someone’s Will. Therefore, anyone who is a beneficiary of a Trust does not have to worry about including the property from a Trust in his/her Will.
Another reason to create a Trust is for asset protection. Since the law considers a Trust to be its own human being, if a person is sued for money or damages, the Plaintiff in the lawsuit cannot access any property held in a Trust for the money or damages. The most common example is a slip and fall on a piece of property. If that property is held in Trust, then the Plaintiff can only receive damages from the property held in the Trust. In this circumstance, the Trust would be the Defendant in the lawsuit, and not any individuals. Oftentimes the only assets in a Trust in this circumstance are the real estate and small bank account. This means that the Plaintiff cannot touch a person’s assets not held in Trust.
On the reverse side, if someone is being sued individually, and that person also has a Trust, the Plaintiff can only access property held in the Defendant’s name individually, and the Plaintiff will not be able to access any property in the Trust for any damages. Trusts can be wonderful tools for people who have many assets that they want to segregate and protect from any potential liability or law suits.
Trusts can also be created for many other reasons. This includes providing for a disabled family member, Medicaid planning, and to establish and maintain life insurance. A Trust does not necessarily have to be established by someone who is very wealthy that wants to manage their money for themselves and their family for generations to come.
Another benefit to a Trust, is the donor/grantor can control when beneficiaries will acquire money or property in a Trust. This is especially helpful when beneficiaries are children who may squander the money or assets held in the Trust if they receive it earlier on in life. With a Trust, the grantor/donor can outline at what age the beneficiaries will receive the money or property, so they are older and more capable of managing these assets responsibly. It is not uncommon for a grantor to outline that younger beneficiaries will acquire an interest in the property in the Trust in installments, such as at 25 years old, 30 years old, and then at 35 or 40 years old.
A Trust is an optional document, but it can be very useful to have depending on how you want to manage your assets and money. A Trust is great document for giving some of your property to your beneficiaries while you are still alive, so you do not have to worry about the beneficiaries going through the probate process to acquire the property or assets.
Wills and Trusts are very different types of documents, but they are also very helpful documents to have in your estate plan. Trusts are not for everyone, but everyone should have a Will. Understanding the differences between Wills and Trusts can be confusing, and that is why it is important to have a knowledgeable estate planning attorney help you through creating your estate plan. A knowledgeable estate planning attorney will speak with you to understand what you want as part of your estate plan, how you want to distribute your assets, and who you want your assets to go to. After speaking with an estate planning attorney, they can recommend how to best accomplish your goals, whether that is only through a Will or adding a Trust to your estate plan as well.