You have probably heard of wills and trusts in the estate planning context, but what is the difference between the two?
Both a will and a trust are used to distribute your assets upon your death. Both allow you to name beneficiaries to receive your assets and a fiduciary to control the distribution of your assets. However, there are some key differences.
While there are different types of trusts, this article discusses what is probably the most common type: the Living Trust (sometimes called the Revocable Trust).
Upon your death, any assets you own will go through probate. While the probate process in Iowa is not as bad as some other states, it can be costly and take months or years to distribute your property to your loved ones. Attorney fees alone can cost up to 2% of your assets.
However, there are also costs to setting up and maintaining a trust. A trust is usually more expensive to draft, and you will have to transfer your assets into your trust (or ‘fund’ your trust). Your trust acts as a separate entity, sort of like a corporation, that will own your assets.
To determine which option is more cost effective, you will want to take a look at your assets and discuss these options with your attorney.
There is also a key caveat to the statement that the assets you own will go through probate. Some assets pass outside of the probate process. Accounts with a pay-on-death designation or beneficiary designation can transfer to your named beneficiary outside of the probate process and regardless of whether you have a will or a trust.
Upon your death, your will is filed with the court. What assets you have and to whom you are giving them to will be public record. Alternatively, a trust is not filed with the court and in Iowa, we have a Certification of Trust, which we can provide to financial institutions or anyone else who may need to know about the existence of the trust. The Certification of Trust provides limited details of the trust and does not require anyone to see the entire trust document.
A trust is effective when you sign the trust agreement, which means that a trust can govern your assets immediately. While this typically does not change much during your life if you are the trustee of your trust, it means a successor trustee can control your assets in the event you become incapacitated but are still living. The executor of your will cannot control your assets until you die.
You will want to choose either a will-based plan or trust-based plan for your estate plan. However, it is slightly misleading to say you will have either a will or a trust because with a trust-based plan, typically you will want to have a will too. There is a very simple will called a ‘pour-over will’ that accompanies a trust. This pour-over will is a backup plan to catch any assets that you forget to transfer to your trust. It ‘pours’ any missed assets into your trust upon your death. Additionally, the will (with either a will-based or trust-based plan) allows you to appoint a guardian for your children in the event one is needed.
Any plan is better than no plan when it comes to estate planning. While a will can be simpler and cheaper to set up, there likely will be more costs upon your death due to the probate process. However, the cost of probate depends on what assets you have and whether your assets can pass outside of probate with pay-on-death or beneficiary designations.
A trust comes with the added work of transferring your assets into your trust, but it allows your trustee to manage your assets upon your incapacitation and is not a public record.
Often, the decision of whether to implement a will or a trust comes down to the value and type of your assets. It is a good idea to review your assets with an estate planning attorney to determine the best plan for you. And as your assets grow or your life changes, it may make sense to change your estate plan.
If you have questions or want to explore options for your estate planning needs, please contact your BrownWinick Estate Planning attorney.
The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship.