Wills and Trusts: Understanding Their Differences & Benefits
Both a will and trust are crucial documents to your estate plan. However, navigating how to establish each document and what to set up first can be a complex venture. Understanding the purpose and benefits of each is the first step. An experienced attorney for wills and trusts can guide you through this process.
While both contribute to a proper estate plan, wills and trusts have many differences. The job of a will is to gather all individual assets and property and dispose of it. The job of a trust is to hold assets, property, possessions, etc. So, rather than disposing of all assets (like a will), a trust holds the assets. With these distinctions in mind, let's delve into the unique roles and features of each.
What is a Will?
A will, called a last will and testament, is a written document that explains how an individual wants their property to be distributed or otherwise dealt with after their death. The individual who creates the will is called a Testator (male) or a Testatrix (female).The action of giving an asset, or gift, to those outlined in the will is called a bequest, while the receivers of those assets are referred to as Beneficiaries.
A will has multiple different functions. A last will and testament:
- Establishes the family and heirs of the Testator or Testatrix
- Designates assets to beneficiaries listed
- Appoints the Executor (or Personal Representative), defines the powers given to them, and pays the debts of the Testator or Testatrix.
- Outlines memorial requests and how to handle the remainder of the estate or property (anything that isn't left to beneficiaries).
Many people change their will throughout their lifetime or create a new will. You can do this either by drafting a new will or creating a codicil. A codicil allows the testator to add to or change part of the existing will. In either case, the document needs to be re-executed. The most recently created will or codicil is the only document that goes into effect. All prior wills hold no legal effect.
Many mistake a last will and testament for a living will. These are two completely different documents with different effects. Learn more about living wills here.
The Benefits of a Will
A will distributes all assets. Through a will, there are two ways assets are distributed. The first is a gift or bequest, which includes specific items left to beneficiaries. The second is called the residuary.
After the executor distributes all bequests to the Beneficiaries, there's often remaining undistributed assets, usually property. For this reason, a will contains a residuary clause. The residuary clause allocates all that is not explicitly bequeathed.
For example, a Testator could choose to give his son a watch and his daughter a ring when he passes. He could also choose to divide his property equally among his two children (this is the residuary).
A will also allows you to make specific memorial requests, whether it be who speaks or where to perform a burial. Many times, people have religious requests. This could be requesting a pastor lead the ceremony, having a time of prayer, etc.
Memorial requests can be as in depth or as brief as the individual wants. Some people simply state that their family will know what to do and make no further requests. It essentially comes down to whatever the individual wants.
When Should You Create a Will?
Many people don't plan to establish a will until much later in life. In reality, the best time to create a will is when you have your first child. In the case you are incapacitated, a will allows you to appoint a guardian over minor children.
Additionally, you can appoint a guardian over any assets you leave your minor children. This allows you to carefully choose a trusted individual to manage these assets responsibly, with your child's best interest in mind. Once the child reaches adulthood, they will then be able to manage these assets themselves.
The guardian over a child and their assets can be two different people, or the same person. If no guardian is listed in the will, the courts must appoint one themselves. To ensure your child's welfare and wellbeing in the event you can no longer care for them, it is crucial to establish a will.
What is a Trust?
A trust is essentially a vessel that holds assets - almost like a box. A trust is an entity that can:
- Hold its own assets and property
- Hold its own social security number (EIN)
- Pay its own taxes
- Sue people
- Collect debts
- Make loans
A trust can do fundamentally anything a person can do with assets and property. Many choose to set up a trust because it allows them to establish specific requirements on how their belongings are distributed. The person who creates a trust is called the Grantor.
The fiduciary of the trust is called a Trustee. A Trustee is charged with administering the trust in the same way the fiduciary (or Personal Representative) of a will is charged with administering the estate and terms of the will.
Contrary to popular belief, trusts are not estate planning tools used only by the ultra-wealthy.
The Benefits of a Trust
A trust has many different functions and advantages that make it a crucial part to any estate plan.
A trust has the ability to give contingent gifts, unlike a will. For example, you can choose to give your grandchild money under the condition they turn twenty five years old before they can receive it. However, these conditions must be set before the gift is given. A grantor is able to set any contingency so long as it is legal and not in violation of public policy.
Any gift given on the condition that the beneficiary does something against the law or against public policy will not be upheld in court. An example of this could be a parent giving their child a set amount of money only if they divorce their spouse, which violates public policy.
A trust can also hold income property. Income property is similar to rental property. Income from rentals can be used to create a revenue stream for Beneficiaries. The trust acts as a landlord. Similarly, an income-trust can provide consistent income to an individual. For example, this could mean the individual receives $1000 every two months (this could be any amount of money over any period of time set by the Grantor).
When Should You Create a Trust?
Many create a trust for the following reasons:
- Avoiding probate: In the event a beneficiary has pre-deceased a Testator (known as a lapse) or both parties are deceased, the property goes to probate. Since a trust is its own entity, it would avoid this issue as all property would instead go to the trust.
- Real estate holding or transfer: In most cases, a real estate transfer is done only by wills when heirs or Executors transfer. Generally, the recorders office requires judicial letters to complete such transfer, which is only done through probate. A trust can avoid this process as the trust itself will remain the property owner.
- Minor distribution: Minors are unable to inherit property or assets directly until the age of majority (legal adulthood). For minor, a trust can hold property until the age of majority, care for the property, invest, and more. It also has the ability to distribute a portion of the funds to the minor and for the care of the minor (e.g. food, clothing, etc.).
- Controlled and contingent distribution: This is the most popular reason for creating a trust. Rather than giving beneficiaries a lump sum (similar to how assets are distributed through a will), a trust controls how or when distribution occurs.
- Contingent distribution establishes requirements for any funds to be given. These requirements could be anything so long as they don't violate the law or public policy. For example, if the Beneficiary struggles with drug addiction, the Grantor could set a contingency of sobriety that must be met before any funds are given.
- Controlled distribution allocates funds over time. Some examples are fund distributed specifically for school during the ages of 18-23, or funds given for a down payment on a house during the ages of 23-30.
- Tax planning: Many choose to set up a specialized trust for reduction or avoidance of state or federal estate taxes.
An Experienced Wills and Trusts Attorney in Washington State
Baxter Legal Services can help you properly set up a trust to allocate your assets to your Beneficiaries, or help you minimize tax liability. We understand the complexities of setting up a will and trust in Washington state and are dedicated to guiding you through a smooth process. Let us help you create a sound estate plan that provides peace of mind for both you and your heirs. Contact us today for expert advice on creating the type of will and trust you need to achieve your financial objectives.