- Wills and Trusts: What’s the Difference?
- December 16, 2014
- Law Firm: Smith Haughey Rice Roegge P.C. - Grand Rapids Office
- Many people ask about the differences between a will and a trust and which is better for them at that point in time. The short answer is: "it depends." Neither is inherently "better," but they are different. Both are legal devices designed to help people indicate how they want to transfer their assets upon death. They also are utilized to nominate the people or professionals who you want to take care of your assets and your loved ones in the event you are unable. Neither is a "one size fits all" device, but one of the two devices-or a combination of the two-is necessary to ensure that your assets and loved ones are cared for as you intend after your death or disability.
Wills are documents that must be submitted to the probate court upon the passing of the person who created it, also known as the testator. This process is known as probating a will. During the probate process, the court appoints a personal representative-a person generally specified in the will-who is authorized to carry out the terms of the will. Financial institutions and other companies will not engage in any transactions with the testator’s accounts until the personal representative is formally appointed by an order of the probate court. Significantly, when the will is probated, it becomes part of the public record. From that time on, the personal representative will work to ensure that all of the testator’s debts are paid and assets are distributed as provided in the will. This process generally takes between six months and one year.
Trusts allow a person to set more specific guidelines on how assets that are transferred into the trust are managed and distributed. Although there are many different types of trusts that are designed to address a wide range of issues, concerns and objectives, the most common type of trust is what is commonly known as a revocable trust or living trust. The creator of a trust is known as a settlor. The purpose of a living trust is to hold assets for the benefit of the settlor during his or her lifetime and, upon death, for other people or charities. The settlor designates a person to oversee the assets of the trust to ensure they are used as provided in the terms of the trust. This person is known as the trustee. The settlor also names people or charities to which the assets should be passed. These people are known as beneficiaries. Typically, the settlor serves as the trustee during the settlor’s lifetime or during the time in which the settlor is able to manage his or her own affairs.
Revocable trusts typically provide for the use of the trust’s assets for the benefit of the settlor during his or her lifetime. After the settlor’s death, trusts allow for the settlor to indicate how, when, and to whom assets are to be transferred. This is distinctly different from a will because, if assets pass to heirs under a will, they receive those assets outright without protection or guidance. To provide such protection and guidance, the settlor may, for example:
Restrict distribution of the trust assets to only the income that accrues on the principal.
Provide that the assets may only be used for the necessary expenses, education, and care of the beneficiaries to ensure that loved ones are cared for without wasting assets to divorces, creditors, or frivolous spending habits.
Put specific restrictions on the age, life achievements, or milestones at which a beneficiary, often the settlor’s children or grandchildren, can receive benefits under the trust.
Design the trust to provide for children or adults with special needs in a way that prevents interruption of needs-based governmental resources.
Importantly, trust assets generally pass without court intervention. Upon the passing of the settlor, the trustee need not get approval from the courts to carry out the terms of the trust. Instead, the trustee may act immediately. This reduces the court costs associated with probating a will, and it can provide privacy as the assets of the trust never become part of the public record.
Lastly, but often overlooked, are the lifetime benefits of having a trust. Trusts can provide a mechanism for designating a person to protect and manage the affairs of the settlor if he or she becomes disabled and is unable to care for his or her affairs. Without a trust, the probate court would have to appoint a guardian and conservator to make decisions on behalf of the settlor. Having a trust can largely bypass that process-and the costs associated with it-by authorizing the trustee to act on the settlor’s behalf.
In short, neither a trust nor a will is necessarily "better" in all situations. Each person’s circumstances require the individual assessment by a competent estate planning or elder law attorney who can review and analyze the entire situation before making an informed plan specifically tailored to a client’s individual needs.