What is the difference between a Will and a Living Trust (“Trust”)? This is a basic question people want answered. Let us examine the primary differences between Wills and Trusts. These differences relate to the following issues: (1) whether a Probate is involved; (2) what assets and legal affairs are implicated; and (3) when does the instrument take effect?
The Will, it is a “legal instrument” that allows you to name an Executor to act as the Personal Representative of your estate. A Will only takes effect after you die. Under court supervision, the Personal Representative will process and settle creditor claims, transact unfinished legal matters, and distribute what remains to your named beneficiaries according to the written terms of the will after you die.
A Will controls so-called probate assets – such as interests in real property, personal property, assets and financial accounts – if interests in these are held in the deceased person’s name individually. It does not control assets that pass automatically to designated beneficiaries (e.g., persons inheriting under insurance, joint tenancy, or retirement plans); nor does it control assets held in Trust. That said, in California a Will must be “probated” if the total probate estate exceeds $150,000 in gross value (i.e., debts are not subtracted).
Probate requires a Petition for Probate to admit the Will and to authorize the Personal Representative to administer the estate. Probate then proceeds with the inventory and appraisal of assets, the notification of creditors, the payment of all taxes, and the settling of creditor claims. It ends with a Petition to distribute assets pursuant to the terms of the Will. The foregoing process often takes around 5-6 months at a minimum and can take much more if there are complications (e.g., creditor disputes , controversy over the terms of the Will, and asset valuation issues, etc.).
A Will is necessary, even if one has a trust, for a number of reasons. Perhaps the decedent had unfinished legal business (a lawsuit for example) pending at the time of death that requires a court-appointed Personal Representative to finish. Perhaps some assets were not transferred into the decedent’s Trust prior to death, leaving more than $150,000 outside the Trust.
A Trust is a contract between the “Settlor” (the person who establishes the Trust) and the “Trustee”, the person who agrees to hold certain property “in trust” for the benefit of “Beneficiaries” according to the terms of the Trust. A Trust controls those assets that are legally transferred to the Trustee. Typically this includes one’s home, rentals, and nonretirement investment accounts.
Unlike the Will, the Trust commences once funded. When the Settlor later becomes disabled, resigns, or dies, a new Trustee (whom the Settlor nominated) becomes trustee. He or she manages the Trust assets and uses or distributes them according to the Trust. Assets inside a Trust do not require Conservatorships or Probates if the Settlor is incapacitated or dies, respectively.
So, when would you want a Will instead of a Trust? Simply put, a Will is preferable for anyone with under $150,000 in probate assets – this excludes Pay on Death accounts. Under $150,000, the decedent’s tangible personal property, financial assets and mobile home can be transferred using the “Affidavit Procedure”. Incapacity planning involve the Power of Attorney. Over $150,000 a Trust is usually preferred because settling a trust estate is usually less expensive, time-consuming and aggravating than settling a court-supervised probate estate. Also, assets held in Trusts now avoid Medi-Cal Estate recovery which since January 1, 2017, only apply a decedent’s probate estate.
Lastly, a Trust may be needed because the beneficiary is a minor, receives SSI/Medical, is susceptible to undue influence, or is incapable of managing money. The beneficiary’s inheritance would be held in further trust for their lifetime in Irrevocable Trusts designed to meet the beneficiary’s own needs and circumstances.