Over the past year as we have all dealt with the stresses of the Covid-19 pandemic. One thing very few people have had on their minds is estate planning – what do you want to happen to your property after you die?

For many of us, planning for our estate is an unpleasant task that we would rather put off for another day. Between the costs of preparing a will, setting up a trust, or deciding how you want to distribute your assets, many people don’t like to think about estate planning!

Luckily, while planning your estate can be tricky, there are a few key things you’ll want to consider when you’re figuring out a plan so that you have the right questions in mind to ask when you speak to a legal professional.

1. What is a will, and how is it different from a trust?

The first thing to keep in mind is the differences between the two main vehicles for estate planning: the will and the trust.

Wills

A will is a legal document that lets you specify how you want your property (your estate) to be distributed after you die. A will may distribute real and personal property to an intended beneficiary regardless of the beneficiary’s relationship with the testator.

For instance, you might want to distribute your savings among your children, your spouse, or a certain charity. A will lets you put these wishes into a legally enforceable document that will be honored by the court.

Trusts

A trust, on the other hand, is a flexible legal structure that lets you avoid the legal process of verifying and executing your will, known as probate, while still controlling who receives your property – including while you’re still alive. A trust creates a legal and fiduciary relationship between a trust administrator (trustee) and your intended beneficiary. When assets are conveyed through a trust, the beneficiary gains legal, equitable title to that property subject to any vesting requirements.  A trust can be revocable (able to be modified by the grantor after its creation) or non-revocable. All in all, trust is a very powerful tool for estate planning.

The main difference between a will and a trust is that a will is normally binding after the grantor’s death, but a trust can potentially be modified by the grantor. As we’ll see, this creates some significant tax implications.

2. How do I know whether a will or a trust is right for me?

Whether you’re better off choosing a will or trust – or both – depends on your individual circumstances, and what you’re trying to achieve. Generally, wills are better if you’re aiming to distribute your assets as simple as possible, and you don’t plan to give significant gifts to your beneficiaries before your death.

One downside of wills is that once the author (testator) of the will dies, the disposition of certain assets, such as real estate holdings, may need to be formally approved by the court as part of the process known as probate. Probate is the judicial procedure under which a document is established to be testamentary (a valid will) or whether it will be admitted to a formal or informal probate procedure to determine the intent of the testator. Whether a will needs to go through probate or not depends on whether it is properly written and formalized, such as being witnessed, and whether the will references certain types of property that always need to go through probate, like real property. Consequently, even when a will conforms to the jurisdictional formalities, a will can still be found void if someone contesting the will proves that the testator lacked testamentary intent.

The more complex the will, or the more competing inheritors there are, the more likely the probate process will cost your heir's attorney and court fees. Also, anyone considering a will needs to keep in mind that there are laws that can preempt part of a will, such as the right of survivorship in a jointly-held property. 

If you’re interested in avoiding the probate process, or you want to give gifts to your beneficiaries now without triggering hefty taxes, a trust might be the better option. If you decide to set up a trust, you’ll need to decide whether you want the trust to be revocable or not. A revocable trust is a type of trust in which the settlor retains the power to terminate or modify the trust at any time during their life. However, revocable trusts do not benefit from the tax advantages of an irrevocable trust.

An irrevocable trust is a trust in which the settlor does not retain the power to modify or terminate the trust. More importantly, this type of trust is not a substitute for a will because it is not subject to the formal probate process; it cannot be revoked without the consent of all beneficiaries. However, because irrevocable trusts allow for transfers during the settlor’s lifetime, such transfers are generally treated as gifts that offer substantial tax benefits.  

3. Do I need a lawyer to prepare a will?

Whichever method you select to begin planning for your estate, it is important to ensure your arrangements hold up to legal scrutiny. This is especially true when it comes to wills. While there is no shortage of online “do-it-yourself” options for wills, you’ll want to be sure that whatever you sign is actually recognized by the court, or else you’ll likely end up dealing with unnecessary and burdensome transaction costs.

As each state has its own quirks in probate, it is critical to make sure your will or estate planning documents are in compliance with the law. For instance, if a will contains a property that is located in multiple states, the probate court may have to decide which state’s law governs the will’s validity and interpretation. State laws can differ dramatically, especially for real property. Failing to take in these considerations can lead to complex and unfavorable outcomes.

4. What happens if I die without a will or any estate planning?

If the whole process of estate planning seems too convoluted and the idea of just letting your family figure things out on their own seems easier, keep in mind that when someone dies intestate (without a will), their property gets distributed according to the state’s default method, sometimes in unexpected ways.

For example, in California, someone’s assets will be divided between their spouse and children by a formula that changes depending on how many children or grandchildren they have. There’s no guarantee that the result will be what they wanted or what the average person would think is fair.

The bottom line

So, next time you’re thinking about estate planning, don’t be confused by the idea of a will, or trust – remember that despite the apparent complexity, these concepts ultimately exist to help you give your property to your successors the way you prefer. If you use the right resources and appropriate guidance, you can deal with all this stress-free, at a reasonable cost in a stress-free and low-cost manner.

Are you trying to better understand where to start planning for your estate? Are you thinking of setting up a trust or composing a will? Let us put you in touch with an attorney who can help explain the details of wills and the different types of trust structures at Trusli.

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