Q. What is the difference between a will and a trust? Some of my friends seem to use the terms to mean the same thing?
A. Yes, many people do use the terms interchangeably, but in reality they are quite different, although they often work together to form a complete estate plan.
A will is a document that directs who will receive your property at your death and only goes into effect upon your death and then only in the context of a court proceeding, called a probate. By contrast, a trust takes effect as soon as you create it and usually does not require court supervision.
A trust is a legal arrangement by which one person, called a “trustee”, holds legal title to property for the benefit of another person (initially, for yourself, and later for your beneficiaries). The initial trustees would typically be you and your spouse, and the successors would typically be the survivor of the two of you, and then your child(ren) in the order you designate. However, you could designate others, such as a trusted friend or a Professional Fiduciary to serve after you. As initial “trustees”, you and your spouse would continue to control and manage your assets as before, albeit as “trustees” of your own trust.
A trust usually has two types of beneficiaries: you and your spouse during your lifetimes, and your children or other designated beneficiaries after your deaths.
A will only directs the disposition of assets that are in your name when you die. A trust, on the other hand, typically serves a “dual role”, in that it controls the use and disposition of assets both during your lifetime, as well as upon your demise. This difference can be very significant if you are, for any reason, unable to manage your financial affairs during your lifetime, due – for example – to declining cognitive ability.
Note: a trust only administers assets property that have been transferred into the trust, usually by re-titling assets into the names of the trustee(s), such as by a new deed. Example: Your home might be transferred via a Deed from John & Mary Jones, husband and wife, to John & Mary Jones, Trustees of the Jones Family Trust.
A will typically requires a formal probate proceeding, which is a court proceeding wherein the administration of your estate is overseen by a judge who approves actions taken or proposed by your Executor. By comparison, a trust administration following the demise of the Trustors is usually handled outside of court, by your designated Successor Trustee, and is typically a less expensive, speedier and private process than probate.
Note: Neither a will nor a trust control assets held in joint tenancy, insurance policies payable to individual beneficiaries, nor financial accounts designated as “Pay on Death” or “Transfer on Death” Accounts. Those assets go to the surviving joint tenant or to the designated beneficiaries, and are usually not controlled by either a will or a trust.
Typically, trust administration would be handled with the assistance of an attorney, but the legal fees would usually be much less than in a formal probate.
Finally, a will becomes part of the public record and is therefore available for anyone to view, while a trust usually remains private.
Wills and trusts each have their advantages and disadvantages. For example, a will allows you to name a guardian for minor children and to specify funeral arrangements, while a trust does not. On the other hand, a trust can be used to plan for disability during your lifetime, for asset management by your successor trustees if doing so becomes too burdensome for you, and can be useful if you need to apply for a Medi-Cal subsidy to help with long term care expenses.
Unfortunately, many people who set up trusts neglect to transfer all of their assets into the trust. That is where a companion will can help: the companion will, often called a “pour over” will, can direct that assets inadvertently left out of the trust be transferred into the trust in order to achieve a coordinated plan of disposition.