Wills vs Trusts: Understanding the Difference
People often come to my office, recognizing the terms “trust” and “will,” but without a clear understanding of their differences. Learning more about these documents – and how they differ and how they can complement each other – will help you build a better estate plan for you and your family.
A Will (also known as a Last Will and Testament) is a document that communicates wishes after you’re gone. It can bequeath assets upon your death to specific people and/or organizations and assign guardianship for minor children and/or pets. In general, wills govern property that cannot be formally retitled into the name of your trust (or is not formally transferred, as the case may be).
Wills only take effect at the time of death and any instructions in the will are carried out by an executor, as appointed by you in your will. Executors will also handle any final finances of the estate, i.e., paying bills and taxes, closing out accounts and collecting funds for distribution.
In California, estates with a value over $166,250 are required to go through the probate process, a legal procedure that is overseen by the court, and one that can be both time-consuming and costly (depending on the contents of your estate). In probate, the court validates the will, oversees it’s administration and makes sure the property gets distributed according to the will provisions. All debts and taxes due are paid from the estate before any bequest is passed onto your heirs.
Wills can be contested, and the entire probate procedure is public record, meaning anyone can see the value of your estate and it’s terms.
If you have a trust and live in California, there’s a good chance you have a pour-over will. This type of will ensures that any assets not titled in the name of the trust at the grantor’s death will “pour over” into the trust and be distributed according to its terms. It’s a safety net that essentially ‘catches’ assets not already sitting in the trust and retitles them to be handled by the trust upon death.
A will only governs the disposition of property owned in your sole name at the time of your death. It cannot address assets that pass directly to a beneficiary by contract or by operation of law such as life insurance policies or joint tenancies with rights of survivorship.
A (Revocable) Trust on the other hand, acts as a container for your assets, standing in as the legal owner of everything you put inside. This is a legal arrangement where property or assets are contributed by one party (also called the grantor or trustor) and held by a trustee, for the benefit of one or more other people, designated by the grantor. The trustee can sometimes be the same person as the trustor or it can be a third party – such as a professional fiduciary.
Your Trust becomes active immediately once you sign the document, and revocable trusts can be changed, restated and restructured (by you) without limitation during your competent lifetime.
After the trust is created, it has to be funded. That means legal title to assets has to be transferred to the trust. For some assets that’s easy. Household and personal effects can be transferred to the trust with simple language in the trust and an assignment of assets attached to the trust agreement. But other assets require more. For real estate, the deed has to be changed to reflect that the trust now is the owner. Automobile registrations have to be changed. For financial accounts, you have to change the name of record with the custodian. That might mean applying to open a new account and transferring the old account assets to the new account. It is important to note that only assets retitled (owned) in the name of the trust are governed by the trust, which is where that pour-over will we mentioned earlier can come in handy.
After your death (or incapacity), this type of trust typically becomes irrevocable- or “locked in place,” that is – no one can make changes, and the person you’ve designated (known as the successor trustee) distributes assets in accordance with the terms of the trust document.
The revocable living trust’s ability to avoid probate is often the primary reason families use them for distributing assets. Revocable trusts are private, flexible, and more difficult than wills to challenge. They can also offer protection from creditors. Trusts can be particularly beneficial if you own real property, especially if those properties are in different states.
Key Takeaways
When you use wills and trusts together, they can complement and enhance the protections provided by each.
If you forgot to include (re-title) property in your trust a Pour-Over Will helps you add those missing assets. It works as an excellent back-up plan. That extra layer of protection in your estate plans can give you peace of mind.
Because your will doesn’t become effective until after you die, you can use trusts to protect your interests while you are alive. If you lose capacity, your successor trustee can step-in and smoothly take over the duties and responsibilities of managing the trust for your benefit.
A trust can spell out specific instructions for assets passed to a minor child in the event of a parent’s death. It can also make staggered gifts to any or all of your beneficiaries, so that you don’t risk handing large sums of money over to someone not prepared to manage it. While trusts can hold and manage funds for children and/or pets, they cannot designate a guardian for them – that is handled by your will.
A trust may be more costly upfront to create and manage, but it does not have to go through an expensive and time-consuming process of probate.
As you can see, having both a will and a trust is a powerful way you show your love. Santa Barbara Fiduciary, acting as an independent, skilled and objective successor trustee and executor, we can alleviate the weight of the burden that death often leaves behind.
Want to make sure that you will be living a life on your terms throughout instability and life transitions and that your loved ones will be safe and cared for when you’re gone? Contact us today! Peace of mind is priceless.
