Wills vs. Trusts: What is the difference?
Both wills and trusts are tools to pass on legal ownership of your accounts, properties and possessions to your loved ones after your death. While both have their place in estate planning they each have their own way of dealing with the distribution of property.
Your Estate and the Probate Process
What is an “estate?” You have probably heard the term but may not know what it means. An estate is simply the legal entity for the things that were in your possession when you died that did not have payable on death beneficiaries established. For instance, if you own a house in your name, your house becomes part of your estate upon your death.
Probate is the process that oversees the management and distribution of the assets of a deceased’s estate property. The probate process is overseen in New York by the Surrogate Court. A person (usually a loved one) files a probate petition requesting to probate a deceased’s estate. After establishing the right to take on the responsibility, the Court will give the petitioner permission to gather the deceased’s estate property, pay the debts of the estate and distribute the property appropriately.
The person in charge of the estate is called the administrator or executor depending on whether the deceased has the will. This individual has to make an accounting to the Surrogate Court and the Surrogate Court will approve and eventually close the estate after satisfaction that the appropriate distributions were made and debts paid.
Your Will
A will acts to communicate to both your loved ones and the surrogate court the desires of the deceased. Distributions of property from the deceased are usually the primary function of a person’s will. However, a will can also advise as to other issues, for example:
Proposing a guardian for minor children left behind by the deceased.
Instructions for funeral services.
An election be be buried or cremated.
When someone passes away, as part of the probate process the executor/administrator has to advise the Surrogate Court whether the deceased had a will. If there is a will, the Court will first examine whether the will meets the requisite formalities and then the Court will require that the executor is following the instructions of the will. If there is no will, then state statute determines the order of distributions and the administrator will be in charge of making sure this order of distribution is followed.
One important thing to understand is that the will only works to distribute property that is part of a person’s estate. Therefore, if beneficiary designations are in place for certain accounts, or your property is not owned in your name, that property does not become part of your estate. If the property is not part of your estate, it will not be distributed by function of your will.
Revocable Living Trust
A trust is a legal entity separate from yourself. Basically, there are three critical participants in a trust. (1) the grantor is the person who creates the trust and grants their property to the trust. (2) the trustee is the person in charge of making sure the rules of the trust are followed. (3) the beneficiary is the person(s) who receives the benefit of the trust property.
In a revocable living trust the grantor, the trustee and the beneficiary are usually all the same person- the person creating the trust- during the life of the grantor. This allows the grantor to enjoy full rights and privileges of his property during his life and gives him all the rights to revoke or terminate the trust whenever he pleases. The grantor also has the ability to name successor trustees that will be charged with using the trust assets to benefit the grantor if the grantor becomes incapacitated during his life. And finally, the grantor will set up successor beneficiaries who will receive the property, or at least right to benefit from the property, after the grantor’s death.
Trusts, including revocable living trusts, limit the property that becomes part of a deceased’s estate because the property is owned by the trust and not the deceased at the time of death. When the grantor of the trust passes away, the successor trustee is authorized by the trust documents to begin distributing the property to the successor beneficiaries pursuant to the rules of the trust, without waiting for court approval. The flexibility and avoidance of probate is the most commonly cited benefit to using a trust for post death distributions instead of a will.
Trusts also have the flexibility to retain possession of property for the benefit of beneficiaries. A grantor can also set limitations to distributions to successor beneficiaries. For instance, a grantor can set a distribution schedule to beneficiaries that depends on the age of the beneficiaries. A grantor can even condition distributions to beneficiaries on certain behavioral factors. For instance, a trust can state that if- in the sound judgment of the trustee- one of the beneficiaries is using illicit drugs, that the would be beneficiary is ineligible for distributions.
Trusts are very flexible documents and can be as simple or as complicated as a grantor desires. They work great to distribute assets seamlessly and without the oversight of the government. However, it is important to keep in mind that a trust only has control over property for which the trust is the legal owner.
Conclusion
If you die without a will or a trust, the State of New York has a way to distribute your money. Most people don’t want to leave it to the state to figure out how to distribute their money and they want to make an affirmative declaration of who they want to take care of.
Increasingly, people want flexibility in how they provide for their families taking into account their particular circumstances. That flexibility is where a trust can be a little bit better than a will.
