Article provided by the Prince Law Firm. Please visit our Web site at www.probateprince.com.
There are several key differences between wills and trusts as instruments created to transfer property, making each desirable for different reasons depending on an individual’s particular situation.
A will is a comprehensive document that sets forth how the testator (the person who created the will) wishes to dispose of his or her property upon the testator’s death. Generally, the will names an appointed personal representative (who carries out the will's instructions) and beneficiaries (who receive the testator's property). The will allows people to plan for the disposition of their property and assets upon death, however extensive or miniscule they may be.
In order to properly effectuate the testator's needs, a will should be created with as much knowledge as possible regarding the testator and his or her family. When drafting a will, the following should be considered: financial information, health information, age, occupation, any prior marriages and resulting children and whether there are any family arrangements (such as domestic partnerships/non-traditional family arrangements) that may subject the will to challenges in probate court. Every will should be reviewed periodically and possibly updated if there are changes in the family circumstances (for example, death or a beneficiary reaching adulthood) or if any contingent beneficiary provisions, such as those relating to death, marriage or children, have been satisfied.
In a trust, one person (the trustee) holds legal title to property for someone else (the beneficiary). The person who creates the trust is usually called a grantor or settlor. Trusts are chosen for their flexibility and wide range of possible uses, and may take a variety of different forms depending on the particular individual’s needs and goals:
- Revocable trust — can be amended during the grantor’s lifetime
- Irrevocable trust — cannot be amended
- Living trust — also called an inter vivos trust, it is created while the grantor is alive and property put into the trust is not subject to probate
- Testamentary trust — created as part of a will and takes effect when the grantor dies
Benefits of Trusts
There are several benefits to creating a trust instrument, as opposed to a will, to carry out the disposition of one's assets upon death.
Trusts are not subject to probate. Probate is the process whereby a will is validated and the decedent’s estate is administered. Wills are subject to probate, whereas trust instruments are not. In Michigan, probate is generally unsupervised. The appointed administrator collects, classifies and values assets; identifies heirs; distributes assets according to the will’s terms; settles debts with creditors; files tax returns; and performs other duties. If there is concern over the administration of the estate, the probate court can order that probate be supervised. If probate is supervised, the judge must approve all aspects of the administration of the estate.
Because trusts are not subject to probate, they avoid time-consuming court proceedings and costs associated with probate. Generally, probate is a slow and time-consuming process even if everything goes smoothly. It can be especially slow if the decedent had a vast or complex arrangement of assets or if claimed beneficiaries contest the validity or interpretation of the will. The probate process can cause strife between family members. In addition, probate can be expensive, with attorney’s fees, personal representative’s fees and an inventory fee.
Contrary to the common conception that the disposition of a will upon death is a private matter, everything that transpires in probate court (such as testimony and rulings on who receives what) will be available to the general public via public records, subjecting heirs to vulnerability, stripping them of control over this information and possibly making then the targets of criminal activity. Thus, because a trust is not subject to probate, matters can be kept private.
Trusts safeguard the decedent's wishes. As people live longer, and often become incapacitated later in life, trusts preclude the need for guardianship (i.e. if the grantor looses the ability to make decision, his decisions could already have been made via a trust at a time when he had full mental capacity; thus he will not need a guardian to help make decisions for him in his later diminished state).
Trusts provide for tax savings. Large estates subject to estate taxes, skipping and transfer taxes can save money by transferring assets from one trust to another, instead of directly transferring assets to heirs.
Trusts allow for asset protection. A trust creator can condition asset allocation to family members on the occurrence of certain events, or place restrictions on beneficiaries' receipt of assets. This can be useful when an intended beneficiary has a gambling or drug problem or is a minor.
Depending on your circumstances, a will, trust, or both may be used to accomplish your estate planning goals.