The 5-year Medicaid lookback period, often shrouded in myths and misconceptions, plays a pivotal role…
Estate planning is a crucial endeavor that allows individuals to safeguard their assets, protect their loved ones, and ensure their wishes are honored when they are no longer around. In this pursuit, two prominent legal instruments often come into play: the will and the trust. While both serve the purpose of distributing assets and providing for the future, they have distinct features and implications. Understanding the differences between these two estate planning tools is essential for making informed decisions and creating a comprehensive plan that aligns with your goals. In this blog post, we will delve into the contrasting characteristics of wills and trusts, helping you navigate the complexities of estate planning and ultimately choose the right strategy to preserve your legacy.
Function and Purpose
Also known as a last will and testament, a will is a legal document that outlines how a person’s assets and property are to be distributed after their death. It allows individuals to name beneficiaries, appoint guardians for minor children, and designate an executor who will be responsible for carrying out their final wishes. A will, on its own, has no power until it is verified and accepted through a probate court after a person has passed away. Once a will has been admitted to a probate court, it provides guidance to the court on how assets are to be distributed.
A trust, on the other hand, is a fiduciary arrangement that involves transferring assets to a trustee who holds and manages them on behalf of beneficiaries named in the trust, according to specific provisions within the trust. A trust can be created during a person’s lifetime (living trust) or through a will (testamentary trust). It allows for the management and distribution of assets, including specific instructions, both during a person’s lifetime and after their death. A living trust, unlike a will, becomes valid at signing, with the legal arrangement existing on the date the trust was created.
The Probate Process
A will generally goes through a legal process called probate after a person’s death. Probate involves first validating the will before appointing an executor (or administrator) to manage and distribute a person’s assets according to statute or their wishes spelled out in the will. A person’s debts (including the legal fees associated with probate) are paid, and then their assets are distributed to the beneficiaries. The probate process is supervised by the court and can be time-consuming, costly, and subject to public record.
Assets held in trust typically avoid the probate process altogether. Because a trust is a separate legal entity, the assets held within it can pass directly to beneficiaries according to the terms of the trust, without going through probate. Because of this, beneficiaries are able to receive their distributions much quicker than if they had to pass through probate.
The Privacy of a Will v. Trust
Wills are generally filed with the court during probate, which makes them part of the public record. This means the contents of the will, including the beneficiaries and the assets involved, become publicly accessible information. During the process of probate, a person’s lineal descendants — those who are their “heirs at law” — and their vested beneficiaries — those identified as beneficiaries in the will — have the right to receive a copy of the will. They also have the opportunity to object to the will, which means it is not in effect until the court has accepted it.
Trusts offer much greater privacy compared to wills. Because trust assets can be distributed outside of probate, the details of the trust, including the assets and beneficiaries, are not typically made public. Only beneficiaries of the trust are entitled to see a copy of the trust, which grants even further privacy.
A will becomes effective only upon the death of the person creating it. It does not have any legal authority during the person’s lifetime.
A trust, on the other hand, typically contains provisions for its implementation both during a person’s lifetime and after their passing. Living trusts are typically effective immediately upon signing, and the assets are transferred and managed by the trustee while the person is alive. Testamentary trusts, on the other hand, are established through a will and become effective upon the person’s death. While the provisions of a testamentary trust remain private, the assets that pass into the trust after a person’s death are public record. This is why most estate planning attorneys will strongly advise their clients to establish living trusts into which their assets can be transferred during their lifetime.
Flexibility and Control
A will allows an individual to appoint guardians for minor children, specify funeral arrangements, and distribute assets according to their wishes. However, once the will is admitted to probate, the court oversees the distribution process, and there may be limitations of the control and flexibility of the instructions. For example, a minor set to inherit through the probate court will typically be required to have a guardianship and trust created to hold their inheritance until they are an adult. If a will is determined to be invalid or is contested by either a lineal descendant or a vested beneficiary, the court will distribute the assets according to statute, rather than a person’s wishes.
A trust, on the other hand, offers greater flexibility and control. They can include specific instructions for the management and distribution of assets, such as staggered distributions, conditions for beneficiaries, or ongoing management for the benefit of a disabled individual. Trusts can also help manage assets in situations where the person creating the trust becomes incapacitated or unable to manage their affairs.
Asset Protection using a Will v. Trust
Asset protection is a critical consideration in estate planning, as individuals strive to preserve their wealth and ensure its smooth transfer to their chosen beneficiaries. While both a will and a trust serve the purpose of distributing assets, they differ significantly in terms of the level of protection they offer.
A properly structured trust can offer significant protection against creditors. Assets placed within certain types of trusts, such as irrevocable trusts, may be shielded from potential claims or lawsuits. Trusts provide a mechanism for long-term asset preservation and management. By specifying detailed instructions within the trust, such as conditions for distributions, staggered payouts, or provisions for ongoing care, individuals can ensure that their assets are protected and preserved for future generations.
While wills do not provide the same level of creditor protection as trusts, they still offer some degree of protection. However, assets distributed through a will may be subject to potential claims or creditors’ rights, which is an important consideration for individuals with significant debts or legal liabilities.
Ultimately, the choice between a will and a trust depends on individual circumstances, goals, and preferences. In some cases, a combination of both instruments may be the optimal solution, allowing you to leverage the benefits of each approach. At Pierce Legal, we can assess your specific needs and provide tailored advice to help you decide whether a will or a trust is right for you. We get to know each of our clients, gaining a meaningful understanding and relationship with you that allows us to create a thorough estate planning strategy that will satisfy all of your planning goals and needs. Contact us today to schedule a consultation at (330) 588-6115.