We are all familiar with the will, that dusty scroll riddled with outmoded phrases like “Know All by These Presents.” Even if you don’t have a will, you’ve watched enough detective dramas to know what a will does and why it is important. But what is a trust? And who needs one? And do you need a will and a trust?
A trust is similar to a will, in that it names someone who is in charge of following its provisions (the trustee), and names those people lucky enough to inherit the trust’s assets (the beneficiaries). Sounds like a will, doesn’t it? Here are the differences:
- A will governs only those assets you own at death that are in your name only, with no joint owner, and no named beneficiary. If you die owning a savings account with $27,000.00 in it, just in your name, that account can only be accessed by the personal representative named in your will, and can only be distributed according to the terms of your will. That account is a probate asset, and must go through the probate process in order for that personal representative to have the authority to access it. On your death, your named personal representative cannot simply waltz into the bank with a death certificate and your will and withdraw the money. He or she must undertake a process through the probate court to be officially appointed before having any access to your account. This takes time and money.
- A trust allows you to avoid the probate process. A trust governs only those assets that you placed into your trust before your death, and any assets that may pour into your trust after your death. A trust is often a separate document from your will. It is an entity that can own assets, like bank accounts and real estate, and can be named as a beneficiary of certain assets, like a life insurance policy. Any asset owned by a trust before your death does not have to go through the probate process. If your savings account were owned by your trust, your trustee could access that account much more quickly and with far less effort than if it were in your name alone.
- A trust allows you to control the distribution of assets after your death. The terms of your trust can require that assets be held for a certain time, and that distributions be made to your beneficiaries only for certain reasons. Perhaps you have young children, and wish to encourage responsible budgeting and instill a strong work ethic. Instead of allowing them to inherit a large lump sum at age 18, your trust holds funds for their benefit, with distributions at staggered ages through their young adulthood. Perhaps you have a family member with special needs, who may be eligible for certain public benefits. A trust can supplement his or her needs without threatening that eligibility. Maybe you have an adult child in a faltering marriage, and want to hold his or her funds until a divorce is finalized to prevent your assets from going to the soon-to-be ex. A trust allows you control, even after you are gone.
- A will is an integral part of an estate plan, and acts as a sort of safety net to catch any probate assets you may have at your death. A trust is usually an separate document to be used in tandem with your will—not in place of a will—that ultimately serves as the master plan for the distribution of your assets. If your personal situation warrants having a trust, your will should have a “pour-over” provision that requires any potential probate assets to pour over into your trust and be handled according to its terms.
There are other benefits to having a trust in addition to a will, including tax reduction and asset protection. There are also numerous types of trusts that serve specific estate planning needs. A thorough planning conference with your estate planning attorney will reveal to you whether and how you would benefit from a trust.