I am often asked about the difference between a Will and a Trust and why one would be chosen over the other, so I thought I would take this opportunity to discuss them both.
A Will is a legal instrument in which a person sets out how his or her estate will be distributed after death. If there is no Will, the person has died “intestate” and State laws dictate how the estate is distributed. With a Will, a person can ensure their assets are distributed to the people and in the manner they desire.
Wills do not avoid probate (the legal process in which a decedent’s assets are distributed under court supervision). In Oregon, a probate is triggered if an estate is worth over $200,000 in real property, or $75,000 in personal property. In California, that trigger is $150,000. Chances are, if you own a home, a probate will be required at your death.
Probates can add unnecessary cost and time in administering an estate. It can take 6-8 weeks from the time a decision is made to petition the court to take a particular action and receipt of the signed Order allowing that action, so it’s easy to see how a probate could really slow things down. The added costs include such things as filing fees and attorney fees for drafting the necessary petitions. The result can be frustrating for all involved and more expensive than necessary.
One of the simplest ways to avoid probate is with a Trust. The three main “players” in a Trust are the Settlor, Trustee, and Beneficiary. The Settlor creates the Trust and is typically the only person who can make changes to the Trust document. The Trustee is the manager of the Trust and the Beneficiary receives the benefit of the Trust assets. In a conventional living Trust, the Settlor, Beneficiary, and Trustee are initially the same person. Only when the Settlor becomes unable to handle his or her own financial affairs does a successor Trustee (chosen by the Settlor) take over the management of the Trust.
The Settlor’s assets (house, bank and investment accounts, for example) are transferred into the Trust to be managed by the Trustee. The Settlor loses no control over the assets in the Trust since they are also the Trustee. However, because the Settlor no longer technically owns the assets, those assets are not part of his or her estate at death and do not trigger a probate. The Trust states how the assets are to be distributed at the Settlor’s death, much in the same way as a Will, but without the need for court intervention. Trusts also provide much more flexibility in how assets are distributed at a person’s death.
It is important to work with someone who understands Trusts and Wills to help you choose the right estate planning vehicle for you. A well-crafted estate plan brings peace of mind to both the person creating it, and those administering it at the end.