I am often asked what is the difference between a will and a trust. I suppose I get this question a lot because a will and a trust both seem to do the same thing – distribute assets at a person’s death. While that is a similarity between the two documents, each document accomplishes the distribution in a different way.
A will goes through the probate process, which is the legal process of submitting a will to the court and going through the legal channels to get assets from the deceased person to the heirs or the beneficiaires. Most people are not super keen on needing to interface with the courts and go through the legal process. I also have had quite a few people tell me that they need a will to avoid probate. They are quite shocked when I tell them that a will needs to go through probate. Perhaps people are imagining a contested probate proceeding, or a formal (or court supervised) probate proceeding when they say probate – something that looks like a full court trial, but most wills go through an unsupervised probate process. This still involves dealing with the courts and going through fixed legal procedures, so that may be one issue with a will that people do not like.
A trust allows you to avoid probate. This can be helpful for a number of reasons, including not wanting to go through probate in more than one state, not wanting your final wishes to become public, or just to make life easier on your loved ones who are left behind. A trust can also allow you to control assets after you die, which can be helpful. You can protect those to whom you leave assets from making imprudent financial decisions. Or, you can also protect assets for those to whom you leave your assets in a trust. If these are helpful to you, then you might want a trust.
Trusts Can Avoid Probate
As a legal planning tool, a trust is helpful to avoid probate. A trust is a legal entity that holds assets for someone’s use – this person is called the beneficiary of a trust. The trustee is the person in charge of carrying out the instructions, or directions, of a trust, and a trustee is the person who controls assets owned by the trust and can use trust assets on behalf of the beneficiary. If you create a trust, you are the trustmaker, settlor, grantor, trustor, and a bunch of other words that mean the same thing – you created a trust. If you are the trustee as well as the beneficiary while you are alive, then you can do whatever you want with the trust until you pass away. When you pass away, the trust does not die with you. Instead, the trust continues on, and a new trustee can take over the trust, that person is called a successor trustee. The successor trustee can then distribute assets to your named beneficiaries in the trust, usually as determined or identified in a written trust agreement.
Because the trust still exists, the assets owned by the trust are not subject to probate proceedings. Instead, the trust is a private document, which can be administered without needing to get the court involved. If your trust is properly created and assets titled in the name of the trust, then the successor trustee and your beneficiaries can have an easier and smoother process to distribute assets than going through probate. By setting up a trust, you can do a lot of the work on the front end of things, instead of leaving all of the work on the back end – through probate – and putting that burden on your survivors.
A Trust Can Protect Your Privacy
Of course, a trust being a private document means that your trust will remain private. Wills that go through probate are available for the public to find and read. If privacy is important to you, then a trust may be the way to go.
A Trust Can Avoid Probate in Multiple States
You also should strongly consider a trust if you own property in multiple states. I have many clients who own a vacation house, part of a family farm, or a cabin in a different state. When someone owns real property in multiple states probate will need to be opened in each state where real estate was owned by the deceased person. The state where the deceased person lived has the primary probate opened, while the other states open what is known as ancillary probate, and the person in charge must deal with the courts in every state, which can be time consuming, expensive, confusing, and a big headache. A trust can avoid probate for all the states, not just one, so a trust may be a good idea if this is your situation.
A Trust Allows You to Control How Assets are Used and After You are Gone
You may not want to leave all of their assets outright to their beneficiaries after you die. You may have minor children who are not able to handle a large amount of money all at once. You may have adult children you are not able to handle a large influx of money all at once, or you may have adult children you are incapable of handling money in large amounts. Using a trust allows you to spread the distributions of assets to your children or other beneficiaries over time. You can tie distributions to certain life events, like a reward for graduating college. Or, you can give a bonus amount to help pay for a down payment on a house, or to cover costs associated with a wedding or birth of a grandchild.
Although incentives seem to work well, you can also restrict how money is used. Restrictions must be allowable under the law, as some restrictions are prohibited, but things like age restrictions, or time elapsed from yoru death are perfectly fine. If you want, or need, to control assets beyond the date of your death, then you will want to use some sort of trust.
Trusts Can Provide Asset Protection for Your Beneficiaries
There are many situations where using a trust to protect assets for your beneficiaries is extremely helpful and useful. If you have a disabled child, or one that has special needs, then you can use a trust to keep funds separate from the child, but have those funds available to care for the child. Many disabled children, or those with special needs, are eligible for government programs to help pay for the care of such a child, but many such programs have asset limits, and giving a disabled or special needs child money outright could jeopardize eligibility for such programs. A properly structured trust can allow for a disabled or special needs child to be cared for without jeopardizing eligibility for such programs. If you have a disabled, or special needs child, you probably want to use a trust.
You can also keep assets in a trust to protect your children from your children’s (or other beneficiary’s) creditors or ex-spouses (in case of a divorce). By keeping your assets in trust, ownership of the asset may be kept legally separate from your children, and that degree of separation can provide asset protection for your children, or other beneficiaries. If that is something important to you, then you want to use a trust.
Establishing the Right Kind of Trust is Important
There are many types of trusts, and not all work for the same purpose. If you want to protect assets from probate, you don’t need the same type of trust as protecting assets for a disabled child, or from creditors. You will want to talk to an estate planning professional who can help you determine the right type of trust for you, and help you get things set up properly. Go here to make an appointment to talk to an estate planning professional.