When you work on your estate plan, you’ll likely hear a lot about wills and trusts. These are two very important tools in estate planning, and although some people might get them confused, they serve different roles.
What is a Will?
The will, or the last will and testament, is a core estate planning document.
The will establishes how a person’s property should be distributed after death. It can name the executor who, if he or she accepts the role, will manage the probate process to pay off the estate’s debts and distribute the remaining estate to the heirs, according to the terms of the will. For the will to have enforcement power, the executor must go through the court process of probate. Also, wills allow parents to name guardians for minor children.
It should be noted that a living will is different. A living will establishes what someone wants to happen if he or she is ever in a coma or otherwise incapacitated with no hope of recovery. A living will is typically part of an advance directive.
What is a Trust?
A trust is a legal arrangement in which a person manages assets for another person. It is also possible for an entity to be put in charge of managing the assets. The establishment of a trust may make it possible to avoid probate, which is often needed with a will. Trusts can serve other purposes as well, such as managing property inherited by a minor. The big advantage of using a trust is that if someone dies and all that individual’s assets are owned by a trust, the trustee should be able to administer the estate without the oversight of the probate court.
There are different types of trusts.
- A revocable trust gives the creator of the trust, called the settlor, the right to revoke or change the provisions of the trust. However, a revocable trust will become irrevocable if the settlor dies or becomes incapacitated. A revocable trust can also be called a living trust or revocable living trust. A revocable trust may help one spouse utilize both spouses’ estate tax exemption amounts.
- An irrevocable trust, on the other hand, cannot typically be easily modified or terminated. Although this may seem less desirable at first glance, it can provide certain advantages regarding estate taxes and creditor protection. It is also possible to set up an irrevocable life insurance trust, which makes it possible for life insurance proceeds to be excluded from a person’s taxable estate for estate tax purposes.
Can You Have Both a Will and a Living Trust?
Wills and trusts can be used together. When properly used together, the will should state that all assets are to be distributed to the living trust after death. This will is called a pour over will. In this setup, a person typically establishes a revocable trust along with a will that directs most assets to become part of the trust when the person dies.
When used in this context, the will exists as a backup, in case the trust was not properly funded. For example, if an individual purchases real property and puts that individual’s name on the deed, the trust has not been properly funded; ideally, the individual should have used the name of the trustee of the trust to make it clear that the trust owns the property, not the individual.
Even if you have a living trust, you may find that you still need a will. This is because wills can do more than simply name heirs and direct the distribution of property. Wills may also, for example, name guardians for minor children.
Some wills contain provisions that create a testamentary trust after death. Parents may feel more comfortable if their children’s inheritance is distributed in full at age 35 instead of 18; testamentary trust provisions are used to create a slower asset distribution, if the parents die before the children reach a certain age.
For example, a single mother may decide that she’d like all of her property to be distributed to her children at her death but she wants her children to receive their inheritance when they are at least 35 years old. She can create a will that includes provisions for a testamentary trust. If she passes away and her children are under the age of 35, a trust would then be established for her children and a trustee would manage the assets and make distributions until her children are old enough to receive their inheritance in full at age 35.
Should You Create Your Own Will and Trust?
As you can see from the brief answers above, there a lot of variations in wills and trusts. There are also countless stories of DIY estate planning gone wrong. A few common mistakes were outlined in this article by Forbes.
There are many good ways to save money, but DIY estate planning is not of them. Wills and trusts are the instruments that facilitate legacies. They are important. They will impact how you are remembered for years to come.
If you’re ready to take the next step with a thoughtful and well-executed estate plan, we are here to help. Contact us to schedule an introductory appointment.