Although both wills and trusts are used for estate planning purposes and can be used together, they are very different methods of transferring property. They can be used at different points in time and accomplish very different objectives.
This article is a brief description that defines and distinguishes wills vs. trusts, and provides a real world example.
What is a Will?
A will establishes who will receive the testator’s probate property upon the testator’s death. The testator is the individual who is deceased.
Probate property is property that does not automatically pass to a certain person on the testator’s death, so it must be distributed according to the testator’s instructions in the will. Non-probate property does transfer to a certain person on the testator’s death regardless of what the will says. Non-probate property might include life insurance or pensions accounts (i.e., 401Ks, IRAs) that have designated beneficiaries, jointly owned property (i.e., joint bank account), and certain interests in trusts.
What is a Trust?
A trust is an agreement that gives one person, the trustee, the legal ownership of the property, but another person or group of people, the beneficiary or beneficiaries, the benefits of the property, such as interest or dividends from bank accounts or investments. The person who creates the trust is called the settlor. A trust can allow the settlor to put more restrictions on beneficiaries’ use of the property than an outright bequest in a will would have.
In Ohio, a trust must be created before the settlor/testator’s death, but does not need to have property in it. The trust can be funded with property that the testator designates as trust property in his or her will; this is called a “pour-over” will. Therefore, the settlor must decide whether he or she wants to put property in the trust during his or her lifetime, which might reduce the amount of control the settlor has over the property, or wait to fund the trust with a pour-over will. The settlor must also decide who will be the trustee for the trust. Trustees can be professionals (i.e., banks, attorneys), family, or friends.
Designating a professional as trustee can be a good choice when there are a lot of assets in a trust that need careful management; professional trustees, however, can be an expensive drain on trust resources. Designating a family member or friend to be trustee can save the trust money, but may lead to mismanaged trust assets or cause tension between family members. As with all transfers of money or property, deciding whether to use a will, a trust, or a combination of both will have federal estate, gift, and income tax implications.
Peggy, a 32 year old married woman with two young children, is discussing estate planning with her husband. They are particularly concerned about making sure their assets are used to care for their children in the unlikely event that anything would happen to both of them. Peggy and her husband have a variety of assets, including bank accounts, stocks, pension accounts, life insurance, the family home, two cars, and household and personal items.
Because Peggy and her husband are young, will continue to accumulate assets during their lifetimes, and must be mindful of planning for their own retirements, they might not want to create a trust that could limit their ability to manage their property. They might consider creating a trust now, but using a pour-over will to fund the trust with the probate assets they would possess at death. The children would be the beneficiaries of the trust, receiving all the benefits of the property of Peggy and her husband. The trust could terminate when the children reach eighteen. If Peggy and her husband have a trusted family member, perhaps the person they would designate as the guardian of their children, they might discuss appointing that person as trustee.
Talk to an Estate Planning Attorney
The specifics of any estate plan depend on the assets in question, including the type and amount, and the goals of the individual. It is always a prudent decision to discuss your estate plan with an attorney.