Wills v. Trusts – Do you know the difference?
So, you are advancing in age and you know you owe your family members the duty of establishing an estate plan with a professional. Good for you. In some instances, the realization that estate plans are necessary comes too late such as when an unexpected death occurs. In those instances, the intestacy succession laws found in the Missouri Probate Code will dictate who receives the deceased person’s estate – state law controls…you don’t. While you can’t take your wealth with you when you go, you can take reasonable steps to control your assets from beyond the grave. In researching the process of estate planning, you’ve heard various terms including Will and Trust, but you are not sure if they differ. Does this scenario sound familiar? If so, read on and become an expert on Wills and Trusts at your next social gathering and in advance of your initial meeting with professionals.
Many people make the mistake to think they are immune from the need of estate planning because they are married. Afterall, assets pass from one spouse to the other through co-ownership or state law and marital deductions within the United States Estate and Gift Tax Law allow for wealth to pass to a surviving spouse with few tax events. But while wealth transfer is often a lesser topic for those who are married, eventually the second spouse will die, and then big trouble can occur.
While often confused as the same thing, Wills and Trusts are very different. Meriam-Webster Dictionary defines each as follows: (a) Will: a legal declaration of a person’s wishes regarding the disposal of his or her property or estate after death especially: a written instrument legally executed by which a person makes disposition of his or her estate to take effect after death; and (b) Trust: an arrangement whereby a person (a trustee) holds property as its nominal owner for the good of one or more beneficiaries. Both a Will and a Trust are estate planning documents used to pass assets to beneficiaries at death; however, there are distinct advantages to using each.
Here are a few ways in which a Will and a Trust are the same:
1. Each allows you to decide how your estate is distributed. Both documents are legally-binding and allow you to determine how your estate is administered upon your death. If you die without either having been established, a probate court will likely decide how your estate is administered, who will administer the estate, and who will receive your net assets. The establishment of either document will also go a long way to minimize family disputes and ease the burden on your loved ones.
2. Each may allow your heirs to avoid a lengthy probate process. Probate is a court-supervised process that administers assets when someone dies leaving a Will or when someone dies without a Will. Because a Trust is a private contract between you as the grantor and the trust entity, it does not generally require probate. But contrary to popular belief, some estates go through a probate or litigation process even if you have a Trust (e.g., Will contests and contests relating to the terms of a Trust are not uncommon). All estates normally go through the probate process if you have a Will. The establishment of either document will reduce the time involved in the probate process as most courts will adhere to your wishes and forego contests regarding those specific topics.
3. Minimize or avoid estate taxes. In each document, you can make gifts and detail donations. Through use of a Will, the amount you give to your heirs can be reduced when it’s time to pay estate taxes because gifts up to the current exemption amount are excluded from estate tax. Confirm current laws each year to take advantage of gift tax exclusions. Through use of a Trust, the amount subject to estate tax could be zero.
4. Each document represents your personal decision making. Both documents allow for their creator/grantor to make the two core decisions to any estate plan. First, a Personal Representative or Trustee is chosen to carry out the wishes of the creator/grantor. Second, the creator/grantor specifically details how he or she wants their net estate distributed to others. Historically, the titles of Executor and Executrix were used to describe the person chosen to administer a decedent’s estate in a Will. Given today’s politically correct environment, those terms have been replaced by the gender-neutral term Personal Representative (few if any people ever called females an Executrix). Trustees are those chosen to administer the assets in a Trust. Both Personal Representatives and Trustees are appointed to ensure compliance to the written wishes by making sure all affairs are in order, paying creditors, terminating contracts, and working with professionals such as lenders, attorneys and accountants. To that end, the choice of a Personal Representative or Trustee is one of the most important decisions anyone will make in the estate planning process in that those parties play one the biggest roles in the administration of an estate.
5. Each allows you to disinherit individuals or groups. Family disputes occur often and tensions, longstanding grudges and hurt feelings sometimes result in the desire to disinherit individuals who would otherwise stand to receive part of a decedent’s estate. In both a Will and a Trust, specific individuals or groups can be disinherited or precluded from receiving anything from an estate. Absent a Will or Trust, the state’s intestacy succession laws will govern who receives part of an estate and those individuals may be the same people or groups you always wished to avoid (such as a troubled child or a lousy sister).
Now that we have discussed how a Will and a Trust are similar, let’s discuss how they differ:
1. While both documents can be used to avoid a lengthy probate processes, only a Trust can be used to avoid probate altogether. Probate is a process of administering assets owned by an individual decedent as well as a process of changing ownership on assets when an individual passes away. Assets that are owned in a deceased person’s individual name are required to be addressed in probate in that the individual is no longer able to transfer ownership through signature or consent. Even something as simple as a person’s checking account may be inaccessible after their death and subject to probate. Without a “payable on death” designation, friends and family members are unable to gain access to individually owned accounts or other assets in the decedent’s name only. The creation of a Will does not avoid probate. Instead, it merely sets forth how the decedent wished his or her estate to be administered in probate. A Trust is an excellent probate avoidance document in that Trust assets are already owned by the Trust and immediately accessible to the trustees for distribution.
2. A Trust is a tool used to avoid creditors of the decedent and his or her beneficiaries. Upon the creation of a Trust, the grantor transfers ownership of assets to the Trust. In that the Trust thereafter owns the assets, creditors of both the grantor and his or her beneficiaries are often prevented from attaching those assets in execution of judgment or satisfaction of a debt. In the alternative, a Will assists in the administration of assets owned by a decedent after death; therefore, it does not provide direct creditor protection.
3. A Trust can prevent the loss of governmental benefits for beneficiaries. A child or beneficiary receiving needs-based governmental benefits such as Medicaid or Social Security must receive assets in a manner so as to avoid termination of program benefits. A Trust enables such a transfer of assets – a Will does not. For example, a disabled brother may receive $100.00 per month for the remainder of his life through a Trust. This nominal amount may not disqualify the brother from governmental aid. Therefore, unless the inheritance you plan to leave is so significant that the governmental benefits become unnecessary, leaving assets to a person with disabilities via a Trust is likely the safest manner in which to ensure the governmental benefits are preserved and that the inheritance you leave will be available to pay for expenses not satisfied by governmental benefits or a welcome supplement to the same.
4. Trusts can help avoid estate taxes. Owning property in a Trust removes that property from your estate for the purpose of probate, but it does not remove the property from your estate for the purpose of estate tax. Your estate assets subject to estate tax includes property owned by a Trust, retirement accounts, and death benefits of life insurance policies. If the gross value of your estate exceeds the exemption amount for the year of your death, then estate taxes become due. In 2017, the exempt amount was $5.49 million. Under President Trump, the Tax Cuts and Jobs Act more than doubled that, increasing it to $11.4 million for 2019. For example, if you die with an estate valued at $11,400,020, only $20 would be taxed. The first $11.4 million is exempt.
Even though moving all of your assets to a Trust does not make them tax exempt, Trusts are still the first line of defense in minimizing estate tax. To avoid estate taxes altogether, an Irrevocable Trust can be employed. The primary difference between a Revocable Living Trust and an Irrevocable Trust for estate planning purposes is that an Irrevocable Trust does in fact remove assets from your estate for the purpose of estate taxes (the Trust owns the assets and they remain uncontrollable by the grantor/creator). This means that assets owned by an irrevocable trust may not be subject to estate tax when the grantor/creator passes away.
5. A Trust is vital to administer assets for minor children without court control. A Will can effectively award assets to a minor child; however, such a distribution is problematic. Leaving assets to a minor creates an administrative nightmare because the law does not recognize the child as having the legal capacity to own or receive assets. For example, if you die with a Will that leaves money to a minor, a court must then appoint a Conservator to receive that inheritance for the minor. The Conservator may be required to report annually to the court and the court will appoint a guardian ad litem or guardian to ensure the Conservator is adhering to his or her fiduciary duty for the minor. This process could mean costs and long delays in administering funds for minors. Upon turning 18 years, the minor will be entitled to receive all of the assets and will be free to do with them as he or she wishes (e.g., buy vehicles, take vacations, shop or lounge around). A Trust is the best way to ensure that the court is not involved in the process and that the minor is restricted to use the assets only for purposes you decide are important and/or at ages that you dictate.
The choice to create an estate plan with a professional is a wise act. When choosing between a Will and a Trust, take your time and compare the pros and cons of each document. In the end, the size of your estate and the manner in which you want it distributed will almost always direct and control your decision making.
Todd Miller is a monthly contributor and regularly writes and speaks on various legal topics including bankruptcy, estate planning, probate and elder law. He formed the Law Office of Todd Miller, LLC, 1305 Southwest Blvd., Ste. A, Jefferson City, Missouri in 2006 and represents civil, criminal, business and governmental clients. Most recently, he was recognized by the Missouri Bar in its Best of CLE Spotlight for his contribution to educate Missouri lawyers and in 2016, he received the prestigious Adviser of the Year award by GolfInc. Mr. Miller earned his juris doctorate degree from the University of Missouri School of Law in 1999 and graduated with honors from Lincoln University in 1991. You may find him at www.toddmillerlaw.com (573) 634-2838 or on Facebook, LinkedIn, and Twitter.