Estate Planning: Wills vs. Trusts

Wills and trusts are the most popular estate planning tools, and you may hear of them referred to in different ways. The revocable living trust may sometimes be called a living trust, a revocable trust, or just a trust. While there are a variety of different trusts, the revocable living trust is just one. A will may also be referred to as a last will and testament. But for us to really understand how wills and trusts work, we need to step back and start with asset titling. For example, I have a checking account down at the local bank in town. This checking account doesn't have any listed beneficiaries or payable on death designations and is only in my name. I tell my friend Bob that when I die, I want him to have that account and sadly, I've passed. So, Bob heads down to the bank to collect his inheritance. When he gets there, they tell him that the account is locked down, and without a court order, they will not be releasing the funds. 

When someone passes, their assets need a place to go. Sometimes an asset has a joint account holder or there's a named beneficiary. But without this, the account must use the probate process or a trust to get it where it needs to go. Probate is the court supervised process of passing assets after death. Your will acts as a roadmap for the probate court. It tells the probate court who you want to be in charge. That would be your executor or personal representative. It tells the court who your beneficiaries are, those that will inherit from your estate, and any terms that may apply, such as not passing assets to children under a certain age. The will is presented to the probate court and once determined to be valid, your executor will be issued what's called letters testamentary. This is the court order that allows them to gather your assets and then divide them based on the terms of your will. 

You may have heard negative things about probate or that it should be avoided. Why do people feel this way? Just like any other lawsuit, probate goes through the court system. Anytime you're dealing with the court, it can be a slow and costly process. Don't let that scare you, though. Probate in many states is quite simple. A trust operates in a similar manner with some key differences. A trust is a robust legal document, usually set out in an outline form. It details who will be in charge, your trustee, who your beneficiaries will be, and any key terms. Unlike a will that becomes effective after you've passed, a trust is a living legal document, meaning you will begin using it once it's created. You will link your assets to the trust using titling or beneficiary designations, and this is often referred to as trust funding. When your assets are tied to the trust, one benefit is, if done correctly, you can avoid probate because the court isn't needed to oversee the retitling of any assets. Different assets are funded in different ways. But one example is your primary residence. Once the trust is created, a new deed is signed where you will transfer your interest in the house from yourself in your individual name to yourself as trustee of your trust.

Now the house is owned by your trust, and you as trustee are in charge of managing all trust assets. Living trusts are viewed as extensions of the person that created them. So during your lifetime, if you have a trust, the trust will use your Social Security number and will not require its own tax ID number or have any additional tax filings. What are other reasons that someone may want a trust? Some states impose an estate tax at the state level, and a trust is a useful tool to mitigate or even eliminate this tax. Those with blended families find a trust to be a great way to protect both the surviving spouse and your children for each side. Those that own real estate in more than one state can use a trust to avoid the need for multiple probates. 

Sometimes, children that are set to inherit may not be equipped to handle a large inheritance, and the trust is created to hold their funds for a longer period of time. There are many reasons that someone may want a trust beyond just probate avoidance. Wills and trusts are both effective tools for handling your estate, and by working with a local attorney, they can help you navigate the ideal options based on your personal set of facts. Regardless of which direction you go, remember, wills and trusts protect not only you—they are designed to protect your loved ones.