If Estate Planning Were a House: The Key Differences Between Wills and Trusts

These two terms are often confused and used somewhat interchangeably. But, wills and trusts are two very different things. When talking about planning for the future, many people just think of a will. Developing a plan requires thinking about more than just what happens when you die. Understanding the important differences between these tools will help you to decide which is best for your situation and your end goals.

What is a will?

A will is a legal document that essentially states who inherits what and when. If your estate plan consists of a will, or maybe no will, then your stuff will have to be probated when you die. Any assets that pass through a will must be filed with the court and undergo the probate process before your personal representative can distribute your assets. Keep in mind that probate is a lawsuit in which your personal representative sues you for the benefit of your creditors.  If you rely on a will alone to pass on what matters, you’re guaranteeing your family has to go to court when you die. Having a will can surely speed up the process but you are still at risk of a lengthy and somewhat public probate.

Wills have been the most popular method for passing on assets to heirs for many years. Mostly, people’s perception is that a will takes care of everything. But, wills aren’t your only option in the estate planning world. And, we all know that there are many different situations that can occur between now and our ultimate destination. There are many people who complete their will and go “Done!” now back to our regularly scheduled life.

But, think anything changes between now and when you eventually pass away? Currently, I’m working with clients who are dealing with the fallout from wills that were prepared in 1995, and 2002. Witnesses have died or moved elsewhere; property was not accounted for; and named representatives have either died or are no longer close enough to the family to accept their appointment. Estate documents need to be thought of as living things.

What is a trust?

Trusts are flexible and powerful tools that can be used to gain greater control over how efficiently and privately your assets and wealth are passed on to future generations. A Trust-based plan is an estate plan that includes a Revocable Living Trust to hold title to your assets during your lifetime and provides ease of transfer in an event of incapacity or death.

Once your trust is established and properly funded, assets will be transferred into your trust, and your plan goes immediately into effect. Because the trust is revocable, it can be altered or amended during the grantor’s (the person establishing trust) lifetime.

There are different types of estate plans to meet your different needs and circumstances such as creating special needs trustspet trusts, or ones to protect your marital situation. Understanding your options can be a complex task, but with help of your trusted advisor and some organization on your end you will be able to find the right plan for you and your family.

The best way for you to be a hero to your family is to determine the best plan for you and your family’s needs. Meet with your trusted advisor and discuss your future goals and concerns. We take our clients through an analysis of their personal assets, the legacy that they would like to leave behind, and their goals for the future.

In the meantime, here are some key distinctions between wills and trusts you should know.

How and When they Take Effect

Let’s take a look at my comparison of a will-based estate plan and a trust-based estate plan. If an estate plan were a house, and you decide to go with a will-based plan:

  • You would be buying a house that you don’t get to live in during your lifetime.
  • You may specify who gets to live in the house when you die but your house will sit on your lot and the keys would be locked up in probate court.
  • After your passing, the person you want to live in your house (which is also known as the representative or executor) must go to the probate court to request the keys to access all your assets that are locked inside your house. The probate court can decide to hand over the keys or they can pick another person that will get the keys before anyone gets to live in the house.
  • The probate court is the only place that has the only original copy of the keys. The personal representative cannot go anywhere to make a copy of the keys. Only when the keys are handed to the personal representative can that person open your house and sell or distribute your assets.

Now, let’s compare the will-based plan to the trust-based plan:

  • You would be buying a house that you can live in during your lifetime and call a home.
  • You can learn your home’s defects and repair them or upgrade your options such as fixing your sink or adding a bathtub. This means you can add or remove assets at any time as you see fit.
  • You can specify who gets to live in your house after you die, but unlike a will-based plan, the probate court is not involved.
  • You get keep the house in great condition and will have copies of the keys. When you die, the next person to live in your house will grab a key and come inside your home. The probate court is not involved saving that person from having to wait months before getting a key and saving them tons of money from filing and court fees.

With a trust, however, you can include provisions that appoint someone of your choosing—not the court’s—to handle your medical and financial decisions if you’re unable to. This keeps your family out of court, which can be particularly vital during emergencies, when decisions need to be made quickly.

The property they cover

A will covers any property solely owned in your name. A will does not cover property co-owned by you with others listed as joint tenants, nor does your will cover assets that pass directly to a beneficiary by contract, such as life insurance.

Long-term separation has an interesting potential consequence. A client’s parents have been separated for about a decade. Each live in their own homestead. No divorce has ever been filed or formally agreed to. Neither parent has an estate plan. So, when one parent dies intestate, the surviving parent will inherit the house. From what I understand, this is not their preferred method of succession.

Trusts, on the other hand, cover property that has been transferred, or “funded,” to the trust or where the trust is the named beneficiary of an account or policy. That said, if an asset hasn’t been properly funded to the trust, it won’t be covered, so it’s critical to work with your trusted advisor to ensure the trust is properly funded. You might be thinking – “well, doesn’t that mean you should have a will and a trust?” Good question, and yes, the two do work very well together.

Unfortunately, many lawyers and law firms set up trusts, but don’t then ensure your assets are properly re-titled or beneficiary designated, and the trust doesn’t work when your family needs it. We have systems in place to ensure that transferring assets to your trust and making sure they are properly owned at the time of your incapacity or death happens with ease and convenience. We also have a blog available here where you can read more about the importance of properly funding your trust.

How they’re administered

In order for assets in a will to be transferred to a beneficiary, the will must pass through the court process called probate. The court oversees the will’s administration in probate, ensuring your property is distributed according to your wishes, with automatic supervision to handle any disputes.

Because probate is a public proceeding, your will becomes part of the public record upon your death, allowing everyone to see information such as the value of your assets and creditor claims. The identities of your beneficiaries are freely available because they are “parties” in the court record. Indeed, any person or entity who makes an appearance will be listed in the public record. Even family disagreements regarding the distribution of assets are exposed to the public. * Note, this is no longer as prevalent an issue in Florida because probate records are not available through the online system. BUT, the probate still exists and can be searched online. While the general public may not be able to access copies of the filings, they will know if someone is challenging a will, claiming payment for debts, and related filings. Also, changes to property records will get the attention of various people. Even Facebook has gotten in on the action by changing a deceased persons’ page to “legacy contact” or “memorialized account”.

Unlike wills, trusts don’t require your family to go through probate, which can save both time and money. Since the trust does not pass through court you get an additional value of privacy as all of its contents remain private.

Because tomorrow is not promised and circumstances can always change overtime, the best time to begin your planning is NOW to avoid the added stress during such hardships. Creating a successful estate plan can mean the difference between a smooth transition of assets or a draining legal proceeding for your loved ones.