Wills vs. Trust

A Will

A will is an essential legal document that’s typically a big part of an estate plan for distributing your assets after death. It can guide everything from personal assets, real estate, and even appointing a guardian for minor children. However, it has limits. A trust can be started at death, but can also be created and funded during your lifetime. It is a vehicle (or an entity, like a business), where it can hold any type of assets and is not contingent on your life/death. A trust continues to handle its assets even after you’re gone. It doesn’t go through probate, like a will, and it provides a lot more control since it operates like a company. However, it often costs more for an attorney to create and has additional challenges. It’s important to know the differences, to know which one, or both, are right for you.

A will is often written by an attorney, and provides the courts and your appointed executor/beneficiaries with details of how to distribute the assets you’ve properly identified in the document. States vary but most states, including Virginia, requires 2 disinterested witnesses to sign and for the will to be notarized. The will should also have a self-approving affidavit accompanying it, or the witnesses may need to be called into court to verify their signing which may have happened 20+ years ago, (And that’s only if you can locate them). When you pass, the executor needs to file the will at the relevant county’s probate court, and thereafter “executes” the will. A will is filed in the public county records, and can be contested by any heir. Prior to your death, the will does not need to be publicly recorded and can be changed by either a new will, which revokes any previous will, or by a proper amendment/codicil of the will. However, it’s important to save the will in a safe place and to let your appointed executor know its location should anything happen to you.  If you need to update a will, due to a life event, be sure to check out my blog on when to change your wills here.   

Beneficiary Designations – Payable On Death (POD)

Notably, a will does not generally affect certain accounts or assets that already have beneficiary designations. For example, if you own a bank account, and already have a “POD” on file, then your payable on death beneficiary will be able to access the bank account by providing bank a copy of the death certificate, and a government ID. Your will cannot override or otherwise change your beneficiaries, as the beneficiary designation goes directly to the recipient while the will goes through the process called probate. (There are certain exceptions to this rule, including VA’s Operation of Law for ex-spouse beneficiary designations). You will want to create or change the beneficiary designation for your accounts if you want someone specifically to receive access to that account and skip probate. This process is often free, and is handled directly with the financial institution (bank/annuity/401k/life insurance policy, etc.). It is highly recommended that you have a POD set up on all accounts, even joint accounts, as it is transferred at death without the delay of probate, and is not taxed.

Probate

Probate Administration is the legal process of the courts approving a will and transferring any assets between the deceased and their beneficiaries. When you pass with a will probate can still be a complicated process, but at least provides a clean way for all assets to eventually get transferred to the people you intended. Any deeds/titles will also need to be changed and will likely incur legal expenses. Without a will, your estate and assets are said to be transferred “intestate”, and the court has the responsibility to determine how to properly distribute your assets for you. Most states follow the same line of succession; first to your spouse, then to your children, then to your parents and siblings, etc. A breakdown of intestate succession in Virginia can be found on the Virginia Code website, here. The process of handling your estate without a will means your beneficiaries have to guess your intent, and more often than not leads to unnecessary family conflict. Your estate will still need to go through probate, but without an appointed executor someone has to step up and request to be your “personal administrator”. This takes at least 90 days to get qualified, because the probate court wants to allow time for other heirs to contest it. After one of your heirs is approved, they still won’t have any written intent and may be required by law to distribute it differently than how you wanted.

With a will, the Executor can file with the probate court and start the process of transferring the estate, (unless someone contests the will). Depending on the size of the estate and type of assets being transferred, the executor usually needs to create and file an inventory of known assets, and then is required to provide annual accountings to the probate court as well as reports to any beneficiary which has provided a written request. However, without a will, someone needs to first get qualified as your personal administrator, which can take months. Once you’re qualified, then you have to file an inventory of the assets and handle the estate based on the legal requirements. Without assistance from a qualified attorney, this process can take years and costs tens of thousands of dollars to fight for your loved one’s wishes. I highly recommend contacting Maddox Law, P.C. if you need any assistance in probate.

Who needs a will?

Every adult should have a will. Whether you are married, have minor children or just a few personal assets. Many people assume an estate plan is only for the wealthy, and assume your spouse automatically gets your assets when you pass. But unfortunately this can be far from true. As discussed, the beneficiary designation bypasses probate and transfers directly to the assigned beneficiary, while the will handles all other assets that do not have a beneficiary designation. Even if you have a trust which may hold your real estate, you should still have a will to handle a guardianship for any minor children, personal assets, or anything that was not properly jointly named or put in the trust.

Many married couples have assets that are still only in your name and, without a will, the spouse may not have access and may not receive the entire asset after probate. In many states if there are any stepchildren, the spouse only receives a portion of your assets and only after the probate process. In Virginia specifically, the rule is 1/3rd goes to the surviving spouse, and 2/3rd’s go to all children (step siblings and biological siblings).

If you pass without a spouse or children, your extended family may be hard to get ahold of and the state may be able to claim all of your assets after the creditors are paid. Or, if God forbid, you and your spouse both pass away simultaneously and you don’t have a guardian appointed in your will, the state can appoint the personal representative and determine what happens to your minor children.

Pros and cons of having a will

A will can have some benefits, but also some limitations. Here’s a chart to better understand the pros and cons.

Benefits

Limitations

– A will creates an established and legally binding document for you to control your assets after you pass. You can decide who is responsible to administer your will by appointing the “executor” of your will. – You can appoint a guardian to care for your children (or even your pets) after you pass. This can be the same person as the executor, or different. – The will is great as a catchall for any personal assets that weren’t otherwise distributed (like your jewelry, or clothes).

– A will has to go through probate, which is a public and oftentimes a lengthy process, which holds up the actual transfer of assets. – A will is open to anyone contesting its contents. – A will is subject to both federal and state estate taxes, (some states don’t have estate taxes). – A will is also subject to probate fees, which is directly based on the size of the estate. – A will does not provide the control or versatility that a trust does

How to Set Up a Will

The best way to set up a will is by contacting an attorney who will draft the document with you as the testator (the person leaving the last will and testament). Before your appointment, you should have an idea of who and how you want to handle your assets. You should also bring any and all files and relevant paperwork, including:

• • Deed(s) to any and all real estate you own, whether jointly or separately

• • Any paperwork for artwork or collectibles

• • Title for any vehicles you own/co-own

• • Bylawys/shareholder agreement for ownership and/or partnership shares of all businesses owned

• • Be aware of all beneficiary designations for your Bank accounts, retirement accounts, and 401k/IRA/Investment accounts

• • Be aware of all beneficiary designations for life insurance policies and annuities

• • Paperwork for any other assets that you own, (boats, rental properties, annuities, etc.)

The will should explain how you want your assets to be distributed, as well as designate the executor. It should also provide a backup incase the executor pre-deceases you. The executor can be a professional, such as your lawyer, friend, or family member. Once the will is drafted, you’ll need to have it notarized and signed in the presence of 2 witnesses. The requirements for witnesses and a notary vary by state, but in Virginia, they should be disinterested from your estate, meaning they shouldn’t be a beneficiary of your estate or at least not inherit more than their fair share.

Trusts

As discussed, a trust is an entity created to hold assets that have been titled over to it. A trust can be created in many different ways, and for many different reasons, but first, trusts are broken down into two different types; revocable and irrevocable. When you create an irrevocable trust, you are transferring the asset out of your name and into the irrevocable trust. The asset is no longer yours and you can’t hold onto part ownership or control. However, when you create the trust, you can determine who handles the trust and it’s assets (called the “Trustee”), and who will eventually receive the assets (called the “beneficiaries”). The trustee does have a fiduciary duty to act in accordance with the relevant state laws, as well as follow the guidelines of the trust itself. An irrevocable trust has some big advantages and disadvantages, which we’ll discuss. One of the disadvantages is that it becomes a separate entity upon creation, and just like a business entity, it needs to file annual reports/taxes. In addition, the trustee is usually able to charge a small fee for any administration, (i.e. filing taxes, maintaining properties, communicating with beneficiaries, etc.)

Whereas, a revocable trust allows you to retain control and ownership of the assets. You can be the one who created the trust and change it while you’re alive, (also known as a “Grantor Trust”). Many attorneys suggest a revocable trust as a part of your estate plan because you can transfer assets to the trust during your lifetime, and name a backup trustee when you pass. It can act like a will, but provides more versatility and control over your assets. Further, because the assets are no longer under your name, it doesn’t go through the will or the probate process. By state law, as soon as you pass, the trust becomes irrevocable (because the “Grantor” is no longer able to make changes), and the responsibility of handling the assets passes to the backup trustee to distribute to the beneficiaries as the trust directs.

A Grantor Trust is simply one type of trust. As I discuss several other options and types of trusts here, the point of this article isn’t to go over every type of trust, but suffice it to say, there are many factors and situations where creating a trust can help save thousands in taxes, prolong an asset, protect assets from creditors, provide for a beneficiary with special needs, be created for charitable purposes, etc. It is recommended that you discuss your specific assets and situation with a qualified attorney to decide what’s best for you.

Who needs a trust?

While Trusts can be advantageous for many people, some of the main reasons you may need one are:

• • Higher Net Worth Families: A trust can provide a way to manage tax liabilities and offer versatility in properly distributing your assets for more complex estates. Without a trust a complicated estate can be a nightmare in probate. There are several areas to watch out for: probate fees, estate taxes (Virginia does not currently have an estate tax), attorneys’ fees for assisting with probate, etc.

• • Parents with minor children: A trust is a better vehicle for you to gradually provide funds over time or to make sure their minor children are cared for. You can place restrictions and distribute assets to the beneficiaries once they reach a certain age or meet a specific condition, like getting accepted into college or get married. You can make the money last and only distribute a certain amount each month, or limit what they use the money for. A will is used just to transfer ownership of a given asset. A trust is created for longer financial success.

• • Privacy: A trust is private, whereas a will is public record. If you don’t want wandering eyes reviewing your financial matters, a trust is the only option. A will is not only public record, but can be contested and become a PR mess. However, a trust bypasses probate, and can be largely kept private. At Maddox Law, when a trust is created, a Trust Certificate is also drafted which shortens the trust to a 2-page Certificate. This Certificate is all that is required by the banks, IRS, etc., and provides additional security and privacy.

Pros and cons of having a trust

There are many advantages to using a trust to protect and distribute your assets, but there are some drawbacks to be aware of:

Benefits	Drawbacks
– It can be created during your lifetime, and be changed as you need it. (For a Revocable Trust) – Avoids probate – Privacy – Allows more control over your assets – Provides options for long term maintenance and support, especially for minor children or special needs beneficiaries	– A trust cost more to create as it is much more complex – A trust often has additional ongoing maintenance costs, especially if you appoint a professional trustee – The administration of a trust can be complicated – If you create an Irrevocable Trust, once the asset is placed in the trust you lose ownership of the asset.

How to Set Up a Trust

A trust needs to be properly drafted to comply with State laws, and needs to be funded by something in order for it to be valid and in effect. It is strongly recommended that you consult an experienced attorney to confirm a trust is right for your situation, and have them create the trust for you. Maddox Law, P.C. drafts personalized estate plans after an analysis of your needs and provides advice on trusts and wills for your specific situation.  A qualified lawyer, like Jonathon Maddox, can also help you decide what assets to put in the trust, how to transfer them, and appoint the right trustee.

Deciding What is Best For You

Now that we’ve explained what trusts and wills are, it’s important to note that they are not complete substitutes for each other and oftentimes both are part of a comprehensive estate plan. A will is the official document which determines how any remaining assets get distributed, while the trust only handles assets placed in it. The will itself can be simple and state that all remaining assets go to the already established trust. In fact, you can even create a “testamentary trust” where the will itself creates the irrevocable trust and transfers everything to it after you pass, and all in the same document. Though, I would caution you, this option doesn’t provide some of the important benefits a trust normally provides.

A trust is especially suitable for managing complex or high-net-worth estates and families with unique needs. Smaller estates and simple family structures may not need the trust.  There are also additional tools available for certain asset types, so be sure to contact an attorney to discuss what best suits your situation.