Wills & Trusts: Planning for “What if…” (Part 1 of 4)
Before I had a child, I was pretty adventurous. I learned how to scuba dive, went tandem skydiving for a birthday, and even rode and owned a motorcycle because it was on my list of things to do before I die. Now, I have to dismiss that list because I’m a parent. It’s no wonder people become “boring” after they have kids – as parents, we have to make sure we live long enough (at the very least) for our kids grow into adults and are able to take care of themselves. The reality of this set in when my husband and I had to make our will. We talked about the worst case scenario and who would take care of our daughter “if…”
When responsible for another life, it’s essential to have a will. I asked West Los Angeles Lawyer Steve Araiza to answer some questions I had about wills and trusts for this post. He did such a fantastic job explaining things in detail. There is a lot of important information, so instead of editing it down, I’ve separated it into four parts. I will publish one part each week for four weeks.
Steve Araiza is a work-from-home dad that says his primary job is taking care of his one year old daughter, Isla. But when he’s not wrangling a toddler he spends his spare time preparing estate plans. He graduated from UCLA Law in 2009 with a specialization in business law, specifically focusing on taxation. After graduating from law school, he worked with Southern California Edison until Isla came along and decided to build his own legal practice. You can find him online at www.thinktrusts.com.
Disclosure: While Steve Araiza is a lawyer, he is not offering legal advice. Posts on legal matters are intended to provide legal information and do not create an attorney/client relationship.
Q. What is the difference between a trust and a will?
A will is a document that lays out your instructions for what is to happen to your property (and potentially to your minor children, and other interests) after your death.
A trust is a separate legal entity that you create during your lifetime, which holds some of your assets in “trust” and then immediately begins managing them according to your instructions in the trust document.
Now let’s look at how these documents function differently at different points in the life of the two documents:
First, the day after your will or trust is created and fully enacted:
If you only have a will, nothing should really change in your life, except that you now have a will in case the worst happens.
If you have a trust, then certain assets that you put into the trust are no longer technically under your control; they now belong to the trust and will be managed by the Trustee. You appoint that Trustee when you create the trust, and most clients appoint themselves as Trustee. If you appoint yourself as the Trustee of your own trust, that means that you can still manage your assets, you will just be doing so in the name of the trust.
Now, let’s look at the day after your death:
If you only have a will, a process will begin that is called probate. This is a process, overseen by the courts, in which any outstanding debts you have are dealt with and your remaining assets are distributed according to your will. Depending on the complexity of your estate this can be a fairly simple process or it can be complex, but either way it will take time and paperwork before the assets in your estate can be passed on to your beneficiaries. Now, with a trust, nothing really changes, except perhaps the Trustee, because the trust has been in existence since before your death and is a legally distinct entity. The trust will contain certain instructions to be carried out upon your death, and it will begin doing so.
Q. What scenario would one choose a will over a trust, and vice versa?
Generally, if you are not the sole provider for anyone (including: young children, non-working spouse, or elderly relatives) and you have no preference on how quickly your beneficiaries receive your estate then a will would probably suffice. If, on the other hand, you do provide for someone, it is probably worth thinking about how you will continue to help provide for those people during the period after your death but before your estate clears probate. One way may be to set up joint bank accounts, another is life insurance (which still takes time to pay out), but the most versatile method would probably be to set up a trust. Depending on your financial situation, I would probably recommend some combination of all three – along with a will.
Which is an important point – even if you have a trust, you should still have a will. This is because there a certain things that have to happen in a will, such as declaring the personal guardian of any minor children, but also because it’s not usually convenient to transfer everything you own into the trust. So even when you have a trust you should set up something called a pour-over will, which essentially states that everything not currently held by the trust should be transferred over to the trust on your death.
Finally, I’d like to note that trusts are often seen as tax-planning tools, and while that can be true in some cases (especially with multi-million dollar estates) that does not mean that trusts are not also an essential general estate-planning tool for people with smaller estates.
Special Thanks to Steve Araiza for contributing to this post. Please visit him online at thinktrusts.com
Check-in next week for part 2 of this series!