A Will is simply a written document that specifies how the person making it wants his or her property to be distributed after death. Wills can also include nominations for who the person would want to serve as the guardian of his or her minor children or disabled/incapacitated dependents.
Wills can obviously be an effective estate planning tool, and for many people they can serve as the primary instrument to carry out their estate plan. However, it is also important to recognize the following:
- There are very strict and specific legal requirements which must be met in order for a Will to be valid and effective. If these requirements are not met, the document which is intended to be a Will may not be accepted or given effect. Often, this can present a worse situation than if no Will were ever prepared.
- A Will can only dispose of what is commonly referred to as “probate property,” which refers to assets which would be subject to administration within the probate process. In general, this would include any property which will not automatically pass upon death to a beneficiary or co-owner, whether by contract, by operation of law or otherwise. It would also include assets which could have passed automatically by such “pre-defined” means, but which the owner designated that they be paid to his or her estate. In contrast, “non-probate property” would pass automatically by operation of law upon death, and might include retirement accounts or life insurance with an effective and appropriate beneficiary designation (other than the owner’s estate), real estate which is titled jointly with a right of survivorship, or bank accounts with a “payable on death” or “transfer on death” designation. A Will can only be effective in guiding the disposition of probate property. Even the most carefully crafted Will can accomplish nothing regarding the transfer of non-probate property.
- The provisions of a Will need to be drafted in coordination with a person’s other estate planning. Provisions which conflict with other planning can create confusion and problems.
A trust is an arrangement in which a person (the “trustmaker”) transfers ownership and control of property to another person with the intention that other person (the “trustee”) hold, manage, and administer the property for the benefit of either the trustmaker and/or other persons designated by the trustmaker (the “beneficiaries”). Trusts are a powerful and flexible way to achieve a variety of important objectives, and they are therefore commonly used in estate planning.
The most common form of trust is the revocable living trust. With this form of trust, a trustmaker transfers property into a trust in which he/she/they also typically serve as the initial trustee and are the initial beneficiary, but the trustmaker also reserves the right at any point to transfer the assets back and dissolve the trust (thereby making the trust “revocable”). With a revocable living trust, the person creating the trust fills all three of these essential roles. In other words, the trustmaker almost always agrees to serve as the initial trustee, and is typically the sole beneficiary of the trust property during his or her remaining lifetime.
Creating a revocable living trust has many potential advantages. Among these is the fact that the trust continues to exist as a legally recognized arrangement even after the death of the trustmaker. The trust can therefore contain provisions for distribution of the trustmaker’s assets after his/her/their passing without requiring that the assets go through the probate process, and the trust can continue to hold and manage the assets, with coordination of management and complete with beneficiary protections, for many years thereafter. For example, assets can continue to be held in the trust for children long after they reach the age of 18, so that protections against unwise spending decisions, the claims of spouses, lawsuits or other creditors, etc., can also continue.
There are also a variety of irrevocable trusts, which are similar in structure to a revocable trust but have substantive terms which cannot be revoked or modified after they have been established by the trustmaker. While this is a broad topic, generally speaking the most common reasons for creating an irrevocable trust tend to be to achieve estate tax savings, or as part of a planning process designed to eliminate legal ownership in the name of the trustmaker (e.g., to facilitate eligibility for various means-tested benefits).
To discuss the possible benefits to you of employing trusts as part of your estate planning, please contact us to schedule a free initial consultation.
A Fundamental Initial Choice
In practical terms, the disposition of property component of every estate plan needs to focus on a primary method by which assets will be passed on to intended beneficiaries. For most people, this will involve making a choice between either a will or a revocable living trust as the primary planning tool. They function differently, but either can be a very effective way to distribute a person’s remaining property after his or her passing.
Whether to adopt a will-centered or a trust-centered approach to planning comes down to understanding the differences between them, and choosing the alternative which is more consistent with your circumstances and preferences.