How to Know if You Need a Will or a Trust
You may be wondering, “Do I need a will or a trust?” Or, perhaps, you’re thinking, “What is the difference between a will and a trust?”
Unfortunately, there are many unscrupulous promoters, who will tell you that you need to set up a trust. These promoters then tell you that the best way to set up a trust is to pay the promoters to do it for you.
These promoters are causing confusion. I’ve had clients come to my office and say, “I need to set up a trust.” I then ask the client, “Do you know what a trust is?” The client then either,
Fumbles around for an answer, and then admits that he has no idea what a trust is, or
Gives an incorrect definition of what a trust is.
Because of this confusion, I’ve written this post.
Difference Between a Will and a Trust
Here’s how Black’s Law Dictionary defines will and trust:
will. “A document by which a person directs his or her estate to be distributed upon death.”
trust. “A property interest held by one person (the trustee) at the request of another (the settlor) for the benefit of another (the beneficiary).”
To further explain what a trust is: Suppose you provide $5,000 to your child, and you specify that your wife will manage the funds until your child turns eighteen. You’ve created a trust. You are the settlor, your wife is the trustee, and your child is the beneficiary.
Thus, the difference between a will and a trust is: A will is a legal document, where you specify how you want your property distributed when you die. A trust is an arrangement where one person manages property for the benefit of another.
A will is always an estate planning device. A trust can be used for other purposes besides estate planning. However, many people use trusts for estate planning, because, a trust survives after the settlor dies, and so a trust can control the distribution of the settlor’s property after the settlor dies. Because a trust is often used for estate planning, you often hear “wills and trusts” discussed together. But, a trust is quite different from a will.
Do you need a will?
I advise all of my clients to make a will. In an earlier post, I discuss in detail why you should have a will. Even when I help a client create a trust, I also help the client create a will.
Here’s why: If you create a trust, you will also have to create legal documents transferring your property into the trust. In these documents, you have to specifically identify the property that you are transferring into the trust. If you have property that you don’t transfer into the trust, and you don’t have a will, then, when you die, a court will distribute the property according to the law of intestate succession (the law that determines what happens to property of people who dies without wills).
But, you may have property that you don’t know about. There is no one in the U.S., who can say, with certainty, that they don’t own property of which they are unaware.
When I create a will, I generally write, “I leave the residue of my estate to ________________.” This clause is broad enough to distribute all property you own, even property you don’t know about, to someone you want to have your property after your death. But, I can’t write a clause like that into a trust.
So, in order to control the distribution of assets you don’t know about, you need a will. A trust does not give you this same control.
One type of will that I often advise clients to execute when they create a trust, is called a pourover will. In a pourover will, you write a will that devises property to a trust. You can create a pourover will that says “I leave the residue of my estate to the ________ trust,” and this clause will transfer all of your property – even property that you don’t know about – to the trust. (However, your heirs will still have to probate the will, after you die. In the probate proceeding, the court will transfer the property into the trust.)
Do you need a trust?
The truth about trusts: A trust is good for some people, but not good for other people.
Valid reasons to create a trust
1. You want to provide property for children, or disabled adults, or persons who otherwise are incapable of managing the property themselves.
Because another person (the trustee) will manage the property, a trust will enable you to care for someone who can’t manage the property themselves.
2. You want to avoid probate.
Probate is a court action, in which a judge distributes a deceased person’s property. Probate is (for some people) expensive and time-consuming. One way to avoid probate is by creating a trust. If you create a trust, the trust will survive after you die. If you name a beneficiary who will have the right to the property after you die, the property won’t go through probate, because the property belongs to the trust, not to you.
One type of probate-avoiding trust is a trust where you name yourself as the trustee and beneficiary during your lifetime and then name another person as the trustee and beneficiary after you die. (This is called a Dacey trust, named after the estate planner Norman Dacey, who popularized this type of trust.) In a Dacey trust, you control the property as long as you are alive, and you can revoke or change the trust any time you want. When you die, the property passes to your beneficiaries, without probate or any court action.
3. You want to keep the distribution of your property secret.
If you write a will, and your property goes through probate, the probate proceeding will be filed in court, and anyone will be able to view the court documents. The public will be able to see your will. Oklahoma courts now post all court documents online. The same is true of courts of many other states.
A trust, however, is confidential, and the public will not be able to see it.
You may have relatives who will be shocked or angry if they see how you are distributing your property, and you may not want them to know where your property is going. In this case, you may want to set up a trust.
Myths about Creating Trusts
What follows are common myths that trust promoters perpetuate about creating trusts. If you want to create a trust for any of these reasons, you may need to think twice:
Myth # 1: Trusts Will Always Save You Money
Trusts save some people money, but they don’t save everybody money. Consult a qualified lawyer or estate planning professional to see if a trust will save you money.
Myth # 2: You Need a Trust to Save Money in Estate Taxes
Only the wealthiest Americans have to pay a federal estate tax. According to the IRS, if you die in 2021, your estate won’t need to file an estate tax return, unless your estate is worth at least $11,700,000. So, if you don’t have this much, you won’t have to pay an estate tax.
Even if your estate is wealthy enough to pay an estate tax, there still may be better ways to save tax money than to create a trust.
Myth # 3: You should always avoid probate.
For many clients, it’s in their best interests to avoid probate.
However, for other clients, probate is simple, and any other estate planning tool will be just as costly as probate. Some of my clients have acted like probate is to be as feared as nuclear war. That may not be true for you.
Myth # 4: A trust is the only way to avoid probate.
This isn’t true. There are other ways to avoid probate; I discuss some of them here. Joint tenancy with survivorship is one way of avoiding probate; I devote this post and this post to discussing joint tenancy.
Myth # 5: If you place your assets into a trust, someone who sues you will not be able to get the assets that are in the trust.
This isn’t true either. If someone sues you, and you go to court and tell the judge that all of your property is in a trust, the judge can simply sign an order allowing the plaintiff to collect funds from your trust. All it takes is the stroke of a judge’s pen.
Myth # 6: A trust is the best way to protect your assets if you become disabled because you can name a trustee to care for your property in the event of your disability.
A springing durable power of attorney (DPOA) can also give someone else the authority to manage your property during your disability. Read about springing DPOAs here.
It depends on your individual situation
Wills and trusts are simply two estate planning tools among many. What you need for an estate plan depends on the precise nature of your individual situation. A blog post cannot tell which estate plan is right for everyone.
If you would like to schedule an appointment with the Persaud Law Office to explore what type of estate plan is best for you, contact us today for a free consultation.