Do You Have a Will or a Trust? Why?By ELIZABETH WYNN,
Elizabeth L. Wynn is a partner with Kyle Wynn & Associates. She handles a variety of probate, estate planning and asset protection matters for many families throughout Mississippi.
In planning your estate, the initial decision to be made is whether to center your plan around a Last Will and Testament or with a Living Trust. According to the AARP, of the people who do estate planning these days, most people prefer to use a trust. In the past the will was heavily favored. What has changed?
In past generations, families were very close, there were few estates that had any tax liability, and children respected their parents’ wishes, both before and after the parents passed away. We live in a different time. Estate litigation is no longer rare. In order for your wishes to be carried out, they have to be in writing, and that writing will govern what actually gets done when you cannot speak for yourself.
The difference between a will and a trust is that a will operates only after your death while a trust operates in the present. A will is a perfectly good way to pass your assets at death, but it cannot provide any help if you become incapacitated during your lifetime. A trust, on the other hand, is in effect from the moment it is properly set up and funded, providing protection and assurance that your wishes will be carried out, both during any period of disability as well as at your death. A will must go through the court proceeding known as probate after you die to become a legally effective instrument to carry out your wishes, while a trust functions without the need for court involvement, both in the event of disability as well as at death.
If you select a will to plan your estate, and because the will is only effective after your death, you will need additional provisions for someone to manage your assets in the event of your incapacity during life. Many people have utilized a durable power of attorney for this purpose, but in recent years, many of those persons have dealt with banks and other financial institutions that refuse to honor their power of attorney, because no one is required by law to honor a power of attorney. In the absence of an alternative, this can mean an expensive and burdensome conservatorship, but a living trust can take the place of the power of attorney and it must be honored. Problem solved.
Some people put their children’s names on their assets to allow them to deal with those assets in the case of the parent’s disability. This sounds good, but can result in the assets being exposed to the creditors of the child, or to great risk in the event of bankruptcy, or even to being considered as an asset to be divided in their divorce, since the child is now a co-owner of the assets. Of course, making a child a co-owner of real property will not give authority to that child to deal with it, but will make his or her interest subject to the claims of his or her creditors, if any. The same problems can arise when using lifetime gifting to avoid probate or to bring down the size of the taxable estate. It can be done with relative safety with a very special type of protective trust for the child, but not with an outright gift.
Don’t want your assets to wind up in the hands of your former son-in-law (or daughter-in-law) and their new spouse? Accomplish your estate planning using a living trust. Particularly where there are children from a prior marriage, you can make sure that your children won’t be “accidentally disinherited,” but that your spouse has the benefits of your estate during his or her lifetime and that your children then can receive their inheritance.
Some people in their planning have chosen to have elaborate trust structures included within their wills. There’s nothing wrong with that, as long as they realize that for these trusts (called “testamentary trusts” as opposed to “living trusts”) to come into existence the will must first go through the probate process. The better practice is to avoid probate entirely using a living trust.
Above all, make sure you understand your plan completely and that it will accomplish your objectives. Some do; some don’t. Make sure yours does. After all, you are paying for it.