Understanding the similarities and differences between wills and trusts, and how they work together can be complicated. It can be hard to answer the most basic question: What’s best for you, a will or a trust?
For starters, it is no longer unusual for families to engage in estate litigation, according to The Northside Sun’s article “Do You Have a Will or a Trust? Why?” Many families who have estate plans incorporate trusts to ensure that their directions are followed.
One of the many differences between a will and a revocable living trust, is that a will operates only after your death. By contrast, a trust performs many tasks while you are still living. A last will and testament is how assets are distributed after death. A living trust takes effect as soon as it is created and funded, allowing your assets to be protected during life, disability and after death.
A will must go through a court proceeding known as probate, before it becomes a legally effective means of carrying out your wishes. A living trust functions without the need for court involvement, both in cases of incapacity and at death.
While you definitely need a will as part of your estate plan, a comprehensive estate plan will also have provisions to prepare for incapacity. Many people have a durable power of attorney. However, this is just one part of the necessary documents for incapacity. In fact, if the power of attorney is too old, the bank may refuse to honor it. This is an all-too frequent occurrence.
In the absence of a recognized power of attorney, the family may need to apply to the court for a conservatorship, which can be costly. A living trust, on the other hand, can be created to facilitate access to assets, without needing court intervention.
Some families try to create an informal estate plan, by putting their children’s names on assets so they can help their parents in the event of incapacity. These self-created plans usually don’t work. The assets are now exposed to any creditors of the child and are at great risk, if there is a divorce or bankruptcy.
Similarly, making an adult child a co-owner of real property will not give the child the ability to sell the property, and once again the asset is subject to the claims of creditors.
This is also the case when using lifetime gifting to avoid probate or minimize the size of a taxable estate. A trust can serve the same purposes, without the risks that an outright gift presents.
This is especially problematic in the event that a child goes through a divorce. The assets could actually end up being owned by the former spouse’s new spouse. Using a trust can maintain control of the assets.
Another family dynamic where trusts are valuable, is when there are children from multiple marriages. When the married couple creates a will that leaves their assets to each other, one set of children is likely to be accidentally disinherited. Let’s say a father has two daughters and a mother has two sons. They marry, and create wills to leave each other all of their assets. If the father dies, the mother inherits his entire estate. When the mother dies, it is more likely that she will leave her estate to her two children. A trust can be created that will facilitate the distribution of the remaining assets that had belonged to the father to his daughters.
Speak with an experienced estate planning attorney to learn how you can use trusts as part of your estate plan, in planning for life, incapacity and death. Trusts don’t have to be complicated to serve your needs. Make sure you understand the trusts, how they work and that they will achieve your goals.
Reference: The Northside Sun (August 14, 2019) “Do You Have a Will or a Trust? Why?”