The Basics of Wills and Trusts and What You Need to Know About Probate
We get a lot of questions about the differences between a will and a trust – but there are a few more distinctions we think you should know.
Understanding how to protect your assets and your family requires knowledge of what protections your will, trust, or testamentary trust actually grants you and your beneficiaries.
What is a Will?
A will is a legal document that is used to direct the distribution of assets, and, when applicable, to appoint guardians for children. An attorney drafts your will, and you can work with them to update it as frequently as needed to ensure it’s still applicable to your current situation.
What Happens When You Don’t Have a Will?
When a person passes without a will, it’s called dying “intestate.” If this happens, the state distributes the deceased person’s assets according to the laws of the state.
The Basic Components of a Will?
A will is made up of several parts, including the people involved. Every will has a testator, an executor, and a beneficiary, here’s a brief explanation of these roles:
Testator: A testator creates a valid will to be executed upon death.
Executor: The person who carries out the wishes of the testator according to the will.
Beneficiary: A beneficiary is a person (or persons) who inherits the assets and/or estate left by the deceased in the will. A beneficiary can also be an entity (e.g., charity, business, trust) rather than a person.
A will, or testamentary will, is prepared by the testator and signed in the presence of witnesses. To ensure the will is comprehensive and makes legal sense, it’s best to prepare a will with professional assistance from an attorney.
There are other types of wills, but they are less likely to be carried out after the testator’s death. An example of a non-testamentary will is a holographic will. A person writes and signs a holographic will, but not in the presence of a witness.
While a will covers many assets, there are several exceptions, such as life insurance payouts. Because life insurance policies name beneficiaries, the will cannot override that distribution. For more comprehensive asset protection, you may want to consider establishing a trust.
A will is subject to the probate court, which takes time and costs money, a will also become a part of public record, which could be a privacy issue for people.
What is Probate?
Probate is the legal process of distributing a deceased person’s estate as designated in their will or by state law or both.
When a person passes without an established trust, the probate process typically proceeds as follows:
- The will or the probate court appoints a trust administrator or executor.
- The court determines if the will is valid, so it makes sense to draft your will with the help of an attorney. Your will must also have the appropriate witnesses according to your state’s laws.
- The court inventories all properties and assets. They cannot be sold nor distributed until the probate process completes.
- The court appraises all properties and uses the assets to pay all debts and taxes that may exist.
- Assets are distributed according to the will if a valid will exists and according to state law if a valid will does not exist.
Why Do You Want to Avoid Probate?
In addition to probate being a public process, it also allows for people to challenge the will, leaving the fate of the will in the hands of the court. Probate is not a quick process.
On average, it takes six to nine months to complete. During the probate process, assets become “frozen,” meaning they can’t be sold nor utilized by beneficiaries.
Maintain Family Harmony
Moreover, often, the surprising drawback for families that go through a probate process is that it may disrupt family harmony during an emotional time.
Family members may feel entitled to assets or may feel they have a more precise understanding of the intentions of the testator than other family members. Or, as mentioned above, family members may challenge a will forcing avoidable issues with other family members.
A properly established trust ensures that a grantor’s vision and intentions come to fruition.
What is a Trust?
A trust is a legal agreement that takes effect as soon as you create it, unlike a will that only takes effect when the testator passes. The trust distributes wealth at a point specified by the grantor.
Trusts are flexible (but do not have to be flexible) agreements that are easily customized to meet the needs of the grantor and the beneficiaries. Contrary to wills, trusts avoid probate court: they do not become public record, and the family maintains a deeper level of privacy.
The Basic Construction of a Trust
The roles of those involved with a trust are similar to those of a will but with slightly different terminology:
Grantor: The grantor establishes a trust.
Executor: The executor is the person or business entity responsible for the execution of the trust.
Beneficiary: The beneficiary receives distributions from the trust.
There are two basic types of trusts – inter vivos (living) and testamentary.
Living Trust
A grantor establishes a living trust when they are still alive and is either revocable or irrevocable. Revocable trusts have more flexibility than irrevocable, but both types avoid probate and help retain privacy.
A trust allows the grantor to decide who receives trust distributions and when. The trust gives complete control to the grantor, avoids probate, and, when combined with a will, creates a comprehensive estate plan.
Testamentary Trust
Not all people establish trusts ahead of time, some trusts come into existence when the grantor dies, and their will directs the formation of a trust. This type of trust is called a testamentary trust.
When a person creates a will, they can specify the creation of a trust upon their death; this does not avoid probate.
After assets named in the will go through the probate process, the court creates a trust. Because of this, the trust will always be under the control of the court.
Sometimes people choose to do a testamentary trust over a revocable living trust because it seems “cheaper” upfront. However, the cost of probate court alone could render this untrue.
Conclusion
A properly established trust will maintain a grantor’s legacy while circumventing the time-consuming and often costly probate process. If you’re looking at the big picture, you can often save time, money, and mitigate family tension by establishing a trust.
Nevada carries the most advantageous trust laws in the U.S. when it comes to privacy, asset protection, and flexibility.
Alliance Trust has many estate planning attorneys that may assist you in establishing or evaluating an estate plan that meets your needs now and for many generations.
We are happy to assist you. We Are Nevada.
