Behind the Robe Podcast: What is a Will?
Behind the Robe Podcast: What is a Trust?
This is the second article in Dragon Law Group’s estate planning series. In part one, we discussed what happens to one’s estate if they failed to create an estate plan at the time of their death, legally referred to as "Dying Intestate". We mentioned that it is essential to grasp the default probate rules applied to an intestate estate. This basic understanding provides insight on what rules one may want to alter, using either a will or trust. Now we can explore the differences between a will and trust.
A will allows one to gift her assets to anyone or anything. Of course, this is not new information, and we all grasp the basic concept of a will. But answering who gets your things after you part is only scratching the surface of estate planning.
Trusts rose in popularity as an alternative to a will in the past few decades, mainly because a professionally written trust can significantly reduce the burdensome probate process. However, even the most detailed trust cannot avoid probate entirely. As trusts were utilized more, some very distinct advantages, other than simply avoiding probate, were discovered. This article focuses on probate distinction, and future articles explore additional benefits.
To understand why a trust reduces probate and its other advantages, one must understand the basic principles of a trust. So let’s start with, the less then helpful, legal definition, which states a trust is created by “a declaration by the owner of property that he or she or another person holds the property as trustee. In the absence of a contrary declaration by the owner of the property or of a transfer of the property to a third party and regardless of formal title to the property." Confused? Don’t worry; it is not nearly as confusing as it seems. Let me explain.
Throughout your life, you obtain possessions in your name: bank accounts, your house, your cars, etc. When you are alive, selling or gifting your vehicle (for example) is easy; you simply sign over the car’s title to someone else. That person then takes the title to the DMV to register it in his name. But this simple transaction becomes impossible after death since a deceased person can’t sign anything.
To solve this problem, you could draft a will to explain who gets your car when you die. Perhaps your will states that you gift your vehicle to your daughter. Problem solved. Except your daughter cannot take the will and title to the DMV to register it in her name. The DMV needs a court order confirming that the will is authentic before the car can be placed in her name. So your daughter must file your will with the court before taking a trip to the DMV. That’s the probate process, and as we discussed in Article 1 of this series, this process can be very time-consuming and expensive.
Trusts can reduce or eliminate the probate process because the law considers a trust an independent entity and treats it the same way it treats a person. An analogous example is a company. A company like Walmart does not actually exist. We just pretend it does to make things simpler. The stockholders do not own the products in a Walmart store. Walmart itself does. Suppose you bought all of Walmart’s stock. In that case, Walmart still owns its products, but you would have complete indirect control of those products. If you died, Walmart continues to operate, and your stock would just get transferred to someone else.
Trusts are similar to that of a company. If you make a trust, then you can transfer things you own into the trust’s name. You can act as the trust’s trustee during your lifetime, meaning you can do anything you want with the trust’s property. You could then name a subsequent trustee to manage the trust’s property when you die. Before death, you can instruct the trustee on how to distribute of the trust property after your death. Thus, if you want to gift your car to your daughter, you simply instruct the subsequent trustee to transfer your vehicle in your daughter’s name. The trust cuts out the court, making the distribution of an estate simple.
The problem is, a trust probably cannot eliminate probate entirely. Even if you put all your assets in your trust’s name, subsequent assets are often placed in the individual’s name, not the trust’s name. One typical example is a tax refund. The IRS will not write a refund check in your trust’s name, it will write it out to you personally, and only you have the authority to cash it. Because you are deceased, you cannot cash it, so the check will have to be submitted to probate so that your heirs can cash and use it. While it’s almost impossible to eliminate probate entirely, utilizing a trust will significantly reduce complications that arise with probate.
In sum, a crucial distinction between a trust and a will is that a professionally written trust can effectively reduce the stress and burden of probate, whereas a will cannot. But a trust will not eliminate probate completely. A simple trust is easy to create and relatively straightforward. But it is advisable to seek the assistance of an attorney since a simple mistake might cause a trust to be void, forcing the estate into intestate succession.
The ability to reduce the probate process only scratches the surface of a trust’s potential. The following article will explore how a trust can ensure one’s loved ones are secure after one’s death, thus giving you control over your affairs long after you pass.