This post is authored by Aaron Black, JD. while not a licensed attorney, Aaron's education in the law provides valuable insight into client financial strategies at Prather White McGowan. He is a great benefit to our Little Rock staff and brings unique perspective to our firm.
Did you ever have the experience of showing up to class only to discover it was test day and you forgot to study?
Or have you ever sat through a presentation and wondered, "Did the presenter even prepare for this?"
Being unprepared is a terrible feeling. Sometimes it is relatively inconsequential; maybe you make a bad grade, or perhaps a presentation bombs. But lack of preparation can sometimes bring disastrous consequences. If a surgeon is unprepared for a procedure, it might cost the patient his or her life.
Financial strategies are tools of preparedness. Investments allow your money to grow over time. Retirement accounts set aside money for later years when you no longer earn an income. In the simplest terms, these are about preparing for a time when you will need money.
So it only makes sense to prepare for a time when you are no longer living, yet your assets continue on.
Estate planning gives you this ability to control the distribution and allocation of your assets, ensuring that you are prepared for what happens to your estate at the end of your life. Some aspects of estate planning allow you to make decisions for your assets while you are alive, and others provide specific directions for after you die. The fundamental goal, though, is to make your wishes clear and legally binding while you are mentally and physically capable of doing so.
Two of the primary estate planning tools are wills and trusts. It is not always clear what the difference is between the two, and we often receive questions from clients asking for clarification.
Wills and trusts are two separate instruments in estate planning that are often used simultaneously to create the most beneficial estate plan for a client. While there are similarities, there are also a few distinct differences.
WHAT IS THE DIFFERENCE BETWEEN A WILL AND A TRUST?
A will is a document created to carry out your wishes related to the distribution of your assets at the time of your death. In a will, the person creating the document is called the testator. A will should appoint a person to carry out the provisions of the will. This person is called the executor. If no person is selected the court will appoint an individual, referred to as an administrator. Individuals who receive property through a will are called beneficiaries. Most wills, like the one referred to above, are called a simple will. Assets distributed in a will might include real property, such as your home, or personal property, such your car, your favorite watch or your private journal. Assets would also include items like cash, money in your savings account, or stocks you hold in a brokerage account.
A trust is defined as a legal entity created by you to hold and manage assets for the benefit of yourself or for others. The person that creates the trust is called the grantor or trustor, and the person who manages the trust is called the trustee. If a person receives benefits from the trust, they are referred to as a beneficiary. Typically, the beneficiaries of a trust are you, during your life, and then after your death the trust beneficiaries are usually your spouse and children. But whether choosing a trust or a will, either can be structured to allow for varied and diverse beneficiaries, which might include other family, friends, colleagues or even charitable organizations.
There are two trusts that are most often used in estate planning. The most common of these two types is the revocable or living trust. Sometimes, this trust is even referred to as a revocable living trust. Don’t be confused by the different names, they all refer to the same sort of legal creation. A revocable trust is one created during your life where you control the trust. You can alter, amend, or even cancel the trust during your life.
The other type is called an irrevocable trust. As you might guess, this trust cannot easily be altered or cancelled once it is created. Because of the permanency of this type of trust, it is not often used in estate planning unless it is for specific asset protection needs.
HOW ARE WILLS AND TRUSTS USED?
One key difference between a will and a trust is that a will distributes property held in your name or owned by you at the time of your death. Trusts, on the other hand, come into effect when the trust is created. Unlike wills, trusts can administer property during your life for your benefit. But they can also administer property at or even after your death for the benefit of others.
Wills have set beginning and expiring dates. A will takes effect at the time of your death but must go through probate. Probate is a process within a state that governs how to determine the validity of a will, and when the will would be allowed to distribute property. The probating of a will can take time, often up to six months or more to complete. And at the conclusion of probate, a will must be completed. There are no provisions that allow a will to continue after probate is finalized. This becomes a challenge when caring for a minor because someone must manage the distributed funds or property until the minor is 18 even though the will has expired. Therefore, if a will is the primary estate planning tool, a testamentary trust is often created at the end of the will which allows for the care of assets for the benefit of the child until they reach adulthood at 18 years of age.
Trusts, on the other hand, have no expiration date. The distribution of property or funds can be done immediately or at set intervals during your life, upon your death, or after your death. Because trusts are “living” documents, they can go on long after your death to manage the assets of minor children, and can even hold these assets for the child’s benefit after they reach adulthood. A trust also allows families to protect or budget the disbursement of assets to a child or beneficiary.
You might also want to know that a will becomes a public document when probate is complete. The will is filed in the county records and can be obtained by any citizen as a public record. However, since trusts are not probated, assets distributed through a trust typically remain private.
Additionally, there are costs and fees associated with the probate of a will, and these costs are prescribed by the intestacy statutes of the given state. Often, they are a graduated percentage of the total assets a will is distributing. Since a trust avoids the probate process, the assets within a trust are not assessed these fees.
SHOULD I USE A WILL, A TRUST, OR BOTH?
After discussing some of their similarities and differences, you can see why a comprehensive estate plan often uses the benefits of both wills and trusts to work together to ensure all of your wishes are carried out. Estate planning can be complicated, but with the correct team of legal professionals and advisors, you can prepare a plan that provides protection for your assets, and more importantly, your family for years to come.