One common Estate Planning question we hear often is: What’s the difference between a Will and a Trust – and which one is right for me? This blog post will explain some of the main differences between Wills and Trusts. You can also check out this video for more information about Wills vs. Trusts.
A Will is an official written declaration of a person’s desires pertaining to their estate upon their death. It typically names an Executor (the person in charge of carrying out your wishes when you die) and also designates a guardian for minor children, if any.
A Will is only activated upon your death. A Will allows you to decide how you want your estate assets, like real property, personal property, and bank accounts, to be distributed. After you die, your original Will must be lodged with the Probate Court so your Executor can begin the Probate Process. When the Probate is complete, the Executor will be able to distribute the estate assets according to the beneficiaries named in the Will.
If you die without a Will, this is called dying “intestate”. In this scenario, a family member or loved one must request to be named as the Personal Representative of your estate. Their request must be approved by a Judge before anything can be done. Eventually, your estate assets will be distributed to your “heirs-at-law”, basically meaning your closest living relatives.
There are several different kinds of Wills to be aware of. The 3 most common types are Testamentary, Holographic, and Pour-Over Will.
Testamentary Will (aka Last Will and Testament): This formal document must contain specific language required by law. In California, it should be signed in front of two adult, unrelated witnesses who do not stand to inherit from the creator of the will. The person creating the trust must also have adequate mental capacity to understand what they are doing.
Holographic Will: A holographic Will is a hand-written document signed without the presence of witnesses. This type of Will tends to be more common in situations where time is short and death is imminent. While a holographic Will can be submitted to the Probate Court in California, it is not ideal as it is more vulnerable to being contested due to its informality and lack of witnesses.
Pour-Over Will: This type of Will is used in conjunction with a Trust as part of a comprehensive Estate Plan. A Pour-Over Will lists a Trust as the beneficiary of all estate assets. We will explain more about how a Pour-Over Will works with a Trust later in the Trust section.
Advantages of creating a Will are:
- Ability to choose the Executor(s) and guardian(s) of your choice.
- Ability to control who gets what and how much of your estate assets.
- Speeds up the Probate process by clearly designating an Executor.
- Cost for a simple Will in California is approximately $250.
Disadvantage of a Will:
- Does not avoid Probate. For more information on how to avoid Probate, check out this blog post.
At a bare minimum, every Californian over the age of 18 should have a simple Will as part of their Estate Plan. But remember that a Will alone will not avoid Probate.
A Trust is a legal arrangement in which your assets are managed by a Trustee for the benefit of you or someone else. It can be used while the creator is still alive. It only controls assets that are placed into it.
A Trust can be used while you’re still alive; hence the term “Living Trust”. For example, if you become incapacitated, your Successor Trustee can step in to perform financial duties in your place while you’re still alive.
Like a Will, a Trust distribution scheme can outline how you would like your estate to be distributed upon your death. But a Trust offers the ability to set stipulations and customize the conditions of when and how the beneficiaries will receive their inheritance.
For example, you can set a requirement that a beneficiary must wait until they reach a certain age of maturity before receiving their portion (for example, when they turn 25 years old). You can require a beneficiary to complete their education before receiving their inheritance. If a beneficiary struggles with addiction or with controlling their spending habits, you can create a distribution scheme that will limit the chances of them using their inheritance in a self-destructive or wasteful way.
Overall, a Trust offers greater level of customization and flexibility when compared with a Will.
There are several kinds of Trusts. Here are 4 of the most common varieties we create for our clients:
Revocable Living Trust: This is the most common type of Trust. As long as the Settlor (creator) has mental capacity, the document can be changed or amended at any time, without the consent of the beneficiaries.
Irrevocable Trust: As the name implies, this type of Trust cannot be changed without permission from the beneficiaries. The grantor (creator) legally gives up right of ownership to the assets in the Trust. An irrevocable Trust offers tax-shelter benefits in some circumstances.
Life Insurance Trust: For those who own very large Life Insurance policies, this type of Trust allows you to remove this asset from your estate. When the sum is eventually distributed, the beneficiaries will not owe any taxes on it.
Special Needs Trust: This type of Trust is often created for a child living with a disability. It allows them to receive an inheritance without being disqualified from receiving Supplemental Security Income (SSI) from the government.
Many California Estate Plans include both a Trust AND a Pour-Over Will. The Executor named in your Pour-Over Will should be the same person you named as Successor Trustee in your Trust to prevent conflicting powers.
A Pour-Over Will does not contain information regarding the distribution of your estate assets. A Pour-Over Will directs that your estate be distributed according to your Trust, including any assets that may have accidentally been left out of your Trust. Thus it “pours over” your estate assets into your Trust.
If you die with a Trust and Pour-Over Will in place, your original Will still needs to be lodged with the Probate Court. However, the Court will simply note that you have a Trust in place and no Probate will be opened on your estate. Instead, your Successor Trustee will privately administer your estate, ideally under the supervision of an experienced Estate Planning attorney. At the conclusion of the Trust Administration, they will distribute the Trust assets according to your Trust.
Advantages of a Trust + Pour-Over Will:
- Ability to choose the Successor Trustee(s) and guardian(s) of your choice.
- Ability to control who gets what and how much of your estate assets. PLUS, unlike with a Probate, the content and distribution of your assets will remain private.
- Saves the time and cost of a Probate.
Disadvantage of a Trust + Pour-Over Will:
- More expensive than a simple testamentary Will. In California, average cost for a complete Trust-based Estate Plan package is approximately $1800-2500.
If you do use both a Will and a Trust together, be sure to choose an Estate Planning attorney you trust to draft the documents. One of the reasons to avoid DIY Estate Planning and always consult with an experienced Estate Planning attorney is that if a Will and Trust contradict each other, litigation can ensue. A recent case called Wilkin v. Nelson (2020) demonstrated what can happen when a Will and a Trust contradict each other.
In this case, a wife had two pieces of real estate which were her own separate property. She wanted to leave this separate property to her two sons from a previous marriage, although she had re-married. She went to an attorney who created an Estate Plan for her, including both a Trust and a Will. She placed the two pieces of separate property into her Trust.
After the wife passed, her husband and sons discovered that her Will created ambiguity by stating that she wanted both her community AND separate property to go to her sons. Her surviving spouse felt that his deceased wife did not intend to leave everything to her sons, only her separate property.
The sons and the surviving husband took the legal battle to court. The husband was ultimately able to win the lawsuit by demonstrating that his deceased wife’s intent was to leave only her separate property to her sons.
In Estate Planning, even a single word can create ambiguity, and ambiguity can result in expensive litigation. Be sure your Estate Planning attorney has the knowledge and experience to draft your Trust or Will clearly, using the proper language required by law.
We hope this blog has explained the difference between a Will and a Trust. If you have any questions about Wills and Trusts and which one is right for you personally, contact us or click here to schedule a no-cost Estate Planning consultation with an attorney.