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ESTATE PLANNING 101: Wills vs. Trusts, What’s the Difference?

Simms_Wills

By: Gigi B. Lawless

 

Most people are familiar with the term, “Will” (or, “Last Will and Testament”).  Less people may be familiar with the concept of a “Trust.”  And, fewer still, will be able to tell you the difference between the two.

Both Wills and Trusts, however, are important estate planning documents. And, whether you live a modest lifestyle or are worth millions, you should have either a Will or Trust in order to leave a legacy to your loved ones.

A Will is a legal document which directs who will receive your property (such as jewelry, furniture, investment accounts, real estate, etc.) upon your death.  Your Will can provide details as to how you want that property distributed, such as leaving different amounts to different people or leaving property to someone only if certain conditions are met – such as graduation from college.  Finally, your Will can select someone to serve as a guardian for your minor children in the event of your death.

In your Will, you nominate a person, called an Executor, to be responsible for distributing your estate according to the terms of your Will.  A Will only takes effect at your death.

A Trust is a legal document which creates an entity into which you transfer your assets.  A Trust is a three-party relationship.  The person who forms the trust is called the Grantor.  The person who manages or controls the property in the trust is called the Trustee.  And, the persons who receive the trust assets when the Grantor dies are called the Beneficiaries.   Usually, while the Grantor is alive, they also serve as the initial Trustee.  When the Grantor dies, a successor Trustee will take over and must follow the instructions in the trust document.

Like a Will, a Trust sets forth how your property will be distributed upon your death.  However, unlike a Will, a Trust includes provisions as to how your assets will be managed should you become incapacitated (or unable to manage your affairs).  It is the job of your Trustee to manage your assets for your benefit should you become incapacitated.

There are many different types of trusts which serve different purposes such as probate avoidance, estate tax minimization, asset protection, etc.

Common components of both Wills and Trusts

There are a number of features that Wills and Trusts have in common.  For instance, both Wills and Trusts do the following:

  • Direct how you want your property distributed upon your death…in other words, give what you have, to who you want, when you want and how you want.
  • Both documents nominate a person who will be in charge of your estate and responsible for following the directions you left behind in your Will or Trust. In a Will, the person who you choose to follow your instructions is called the Executor and, in a Trust, that person is called a Trustee.
  • For your estate plan to be complete, both Wills and Trusts require ancillary documents: Health Care Power of Attorney, HIPPA Authorization, Advance Medical Directive (Living Will), General Durable Power of Attorney

Differences between Wills and Trusts

There are some pretty significant differences between Wills and Trusts:

  • In a Will, you can name a Guardian for your minor children. You cannot do so in a Trust.
  • A Will must go through Probate. Probate is the court-supervised legal process that takes place after someone dies.  There are fees and costs associated with probate.  Furthermore, there are filing deadlines that must be met (inventory, accountings, etc).  In Loudoun County, Virginia, for example, the Commissioner of Accounts oversees that process.
  • Because a Will must go through the Probate process, it gets recorded with the Probate Department and, as such, becomes a public record. A Will is subject to public record searches.
  • Trusts do not have to go through probate and, as such, avoid the probate process altogether. After the Grantor dies, the Trustee can seamlessly step in (or continue) to manage the Trust without any court supervision or approval.
  • Since Trusts do not have to go through Probate and do not have to be filed with the Probate Department, they remain private documents.
  • A Will only becomes effective upon your death.
  • A Trust becomes effective as soon as it is signed and directs how you want your property controlled during your lifetime, during any incapacity suffered by you and ultimately, at your death.
  • A Will does not contain any provisions for incapacity.

Why choose a Will instead of a Trust and vice versa:

For many people, a Will is a wonderful estate planning vehicle – it serves the purpose of identifying who you want to inherit your property after your death.  However, please keep in mind that a Will is not a “one size fits all” document.  Each Will should be carefully tailored to meet a client’s specific needs.

You should consider using a Will if:

  • You are married, do not have any minor children and your net worth is less than the federal estate tax threshold,
  • You are single (never married, widowed, divorced), do not have minor children, and your net worth is less than the federal estate tax threshold.

You should consider using a Trust if:

  • You own real property in another state. Since a probate must be opened in every jurisdiction in which you own real estate, it will save you time and money to create a Trust.  Trusts can hold deeds for property in multiple states.
  • You have minor children. Assets of minor children should be held in trust for the benefit of those children.  If you do not have the proper estate planning documents in place and your children inherit property while they are minors, a guardian or conservator will be appointed to control the money for them and, in most states, the guardian has to turn over control of the assets to the children once they turn 18.
  • You have a special needs child. A Trust can protect assets for a beneficiary with a disability.
  • You have a beneficiary with substance abuse issues. A Trust can safeguard assets for a beneficiary with an addiction.
  • You have a “blended” family. You are in a second marriage but have children from a previous marriage.  By establishing a Trust you can ensure that your spouse is taken care of while safeguarding an inheritance for your children.

Estate planning is a complex and sophisticated area of practice that requires a thorough knowledge of state and federal law governing Wills, Trusts, Powers of Attorney, Gift and Estate Taxation, Property, Probate Administration, Charitable Giving and Business Entities.

Due to the complicated nature of estate planning and the considerable amount of thought that goes into the design process, a Will or Trust should be drafted by an attorney who specializes in this area of the law.

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Disclaimer: This memorandum is provided for general information purposes only and is not a substitute for legal advice particular to your situation. No recipients of this memo should act or refrain from acting solely on the basis of this memorandum without seeking professional legal counsel. Simms Showers LLP expressly disclaims all liability relating to actions taken or not taken based solely on the content of this memorandum. Please contact Gigi Lawless at gbl@simmsshowerslaw.com or Robert Showers at hrs@simmsshowerslaw.com  or call at 703.771.4671 for legal advice that will meet your specific needs.

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