One of the most common questions I receive when talking to clients about estate planning is, “What is the difference between a Will and a Trust?” Here is how I explain the answer:
Probate vs. Non-Probate Assets
Think of two boxes – a probate box and a non-probate box. If you were to list out all of the assets you own—real estate, financial accounts, investments, vehicles, and even personal belongings—who owns those things? The usual answer is that the client owns them in their own name. Those assets in your own name generally fall into the probate box. For an explanation of what probate is and why we generally want to avoid it, CLICK HERE. There are certain ways you can take assets out of the probate box and put them into the non-probate box to avoid the common problems associated with probate. This is ultimately the goal of estate planning. There are usually three scenarios that play out with estate planning.
Option 1 – The Ostrich Approach
Unfortunately, many people wish to play the ostrich and bury their heads in the sand when it comes to thinking and planning for their death. It is uncomfortable to think about, so many people simply choose not to do so. Another common misconception is that the family knows who is supposed to receive specific assets, and that will automatically happen. This could not be further from reality.
If you were to pass away without ever doing any type of estate planning, your heirs would have to go through probate in order to transfer those assets to the rightful persons. A Personal Representative would usually have to be appointed informally or formally. Probate can take several months if not over a year. Furthermore, all assets in the probate box (e.g., assets owned in your own name) will be distributed under Arizona’s intestate succession laws. That might not necessarily be how you want your assets to be distributed, and it will leave your family incurring the added cost and delay of probate. Arizona law also decides who is going to be in charge of that process. At the end of the day, the ostrich approach leaves your family members in a difficult (and expensive) situation that can be avoided with proper planning.
Option 2 – Creating A Will
If you create a Will, the Will controls all assets that are in the probate box rather than Arizona intestate succession law. A Will lets you identify who will be in charge of managing the Estate. A Will also identifies who will receive the assets upon your death. This can be as simple or specific as you want to make it. It is your Will, and it will control all of your probate assets. That resolves the problem of Arizona law dictating those decisions rather than you, but it leaves the problem of the Will still having to go through probate.
Option 3 – Move All Assets To The Non-Probate Box
Under this option, the goal is to remove everything from the probate box, so that there is no need to go through the probate process. There are several ways to do this.
One of the primary ways is through a Trust. The Trust serves as a smaller box within the non-probate box. Once you have drafted and signed a Trust, that Trust exists and can own assets. However, one of the most important steps of creating a Trust comes next, and it is often overlooked. This next step is called funding the Trust. To fund your Trust, you must re-title your assets into the name of the Trust or name the Trust as a beneficiary on certain accounts (confirm with your financial advisor first). For example, if you own real property, you would likely want to record a deed conveying the property to the newly-formed Trust. That takes that real estate out of the probate box and puts it into the Trust box. Because the Trust box is in the non-probate box, there is no need to go through probate in order to distribute that property to the rightful beneficiaries of the Trust. For a bank account, you might keep the account in your own name, but you would want to name the Trust as a payable on death beneficiary (POD). That allows the Trust to receive the money in that account once the financial institution has received your death certificate.
The problem with forgetting to fund your Trust is that your assets remain in the probate box. You just spent the time and money to create a Trust, but the Trust only controls the assets that have been put into the Trust box. The Trust does not, on its own, control the distribution of assets that are still in the probate box. I have had countless clients that have hired me to help with a probate because their family member forgot to remove their assets from the probate box and put them into the Trust box. This often defeats the whole purpose for which the Trust was created—to avoid probate.
Summary
The two biggest differences between a Will and a Trust are 1) what assets they control, and 2) what process is required to follow the terms of the Trust. A Will controls assets in the probate box, but it must go through probate in order for the Court to accept the Will, appoint the Personal Representative, and ultimately make the final distributions. On the contrary, a Trust controls all assets that have been put into the Trust box, but, generally speaking, a Trust does not require any court proceedings. Not only does this let you control all aspects of who will be in charge, and who will receive your assets, but it offers a much more efficient process by avoiding Court involvement in the administration and distribution of the Trust assets. This makes the process much easier for your family and friends, so they can focus on the more important things in life.
Estate planning does not have to be overwhelming, and you do not have to figure it out alone. If you do not yet have a Trust, we can help you draft one that fits your family and your goals. If you already created a Trust but never finished funding it, we can help you retitle your assets, record the right deeds, and update beneficiary designations to ensure the Trust does what you intended. And if you simply want peace of mind, we can schedule a consultation to review your Trust and your assets to confirm that everything will work the way it needs to. Our attorneys regularly work alongside financial advisors, bankers, insurance brokers, and CPAs, so that your estate plan fits with the rest of your financial picture. Contact us today to schedule a consultation.