What Is the Difference Between a Will and a Trust?
Author: Prime Law Group
Did you know that more than 50% of Americans do not have a will or trust?
There may be many reasons for this, such as some of us do not want to think about death, so we put off planning for it.
For others, there may be hesitance to begin the process of estate planning because we do not understand all that is involved. Or, we may not understand exactly what questions we need to ask, depending on our financial situation.
For instance, what is the difference between a will and a trust?
How do we know which is better? Or who to trust with procuring these documents?
Read on for all this information and more.
What is Estate Planning?
An estate plan is, simply put, a list of directions that document how you want your property managed throughout your life and then allocated after your death.
Your estate plan should contain:
- Information on how you want your assets arranged while you are living. This should help your estate to be its most tax-efficient and help you save money.
- Particulars on how you want property and assets divided between beneficiaries at your time of death.
Who Needs an Estate Plan?
We often hear of estate planning in connection with the uber-rich. However, there are many benefits to estate planning outside of just tax relief.
Making an estate plan can help save time and money for your family after you pass away as it can eliminate the need for probate. If you own a small business, estate planning can ensure a stress-free transfer to your chosen beneficiary. In short, estate planning can and should be for everyone.
Who Creates an Estate Plan?
You should seek out professionals to help you put together a comprehensive estate plan. This may include not only an attorney, but potentially also an accountant, a life insurance agent, and a financial planner.
They can guide you through setting up every area of your estate plan to help you to prepare throughout life as well as make arrangements for after you pass away. You should review your estate plan regularly with your professionals to ensure no changes are necessary, especially if you purchase additional property or other major life changes, like marriage or divorce, occur.
What Is the Difference Between a Will and a Trust?
Most of us have heard of both trusts and wills but may not have an understanding of each or how they differ. They are both tools that you utilize for estate planning, and a better understanding of them can help us to be more comfortable with them.
Hopefully, this will also allow us to make better-informed decisions when it comes to planning for the futures of our loved ones.
What Is a Will?
A will is a legal document that you prepare to give instructions on how a person wants their assets distributed when they die. A will does not go into effect when you sign it, but instead when you pass away.
In your will, you will lay out how you want your assets distributed. You can leave things to your family, friends, and even charities.
After your death, these wishes are then carried out as laid out in the will unless contested.
Who Prepares a Will?
A will is best prepared by attorneys as they will help you determine how to best craft your will so that it will be as precise as possible. They will also be familiar with all of the legalities surrounding drawing up your last will and testament. For instance, in Illinois, the creator of the will must also have two witnesses sign the will. Neither of these witnesses may be beneficiaries listed in the will.
In Illinois, the signer of a will must be 18 years of age for the will to be officially recognized by the state.
A will can be changed at any time throughout a person’s life. Whenever changed, it will need to have the necessary two witness signatures.
Reasons to Have a Will
There are many important reasons to have a will. Here are several of the top considerations:
Name Who Will Oversee Your Estate
When you die, you leave more behind than just your physical possessions. There are other things to be managed and taken care of and someone must be named to do these takes. Bank accounts must be closed, household accounts must be notified, creditors must be told, and the list can grow quite lengthy.
You will want to choose someone you trust and who can be depended on to handle your affairs responsibly. You will name this person in your will and they will carry out these tasks on your behalf.
Less Stress on Your Family
When you have a will, this means you have laid out instructions for how you want to estate distributed. This also means the process of probate court (discussed later in this article) will be much smoother for your family. Without a will in place, the state has to step in and appoint someone to manage your estate and the process can be a long and arduous one. Your family will be grateful you save them this stress by leaving a will stating your wishes.
Choose Who Will Care for Children
If you have young children, you must name your preference of who will take guardianship of them should something happen to you.
If the children’s other parent is still living, they would retain sole custody. However, if both parents are deceased, a decision must be made as to who will be the children’s guardian. This should be laid out in the will so there is no question and no fighting about where the child will be placed.
You can also specify if you would like to leave a monetary amount to your children or their guardians to help with their care.
Choose Who Will Care for Pets
In addition to specifying who will care for any children you may have, a will is also a place to name who will care for your pet(s) after you die. Many people have concerns about what may have to a beloved pet as they age, and specifying this in their will can give great peace of mind. You can also leave funds for your pet’s guardian to help with their care.
Make Clear Who Will Receive Your Assets
Most of us are aware that we create a will to facilitate who receives any belongings we leave behind. However, you can also specify beneficiaries for any assets that you do not list in your will. Such as, “any remaining books not listed in this will should go to the public library.”
You can also single out individuals you do not want to receive any of your assets if there is someone you specifically do not want inheriting any items or funds.
Choose Who Will Handle Digital Assets
As we move further and further into the digital age, it is important to consider who will manage your digital property once you are gone.
This person will manage and close social media accounts, email accounts, digital photo libraries, and other digital accounts you own. You will want this to be someone you trust, who will handle things according to the instructions you give.
You may also want to give instructions in your will for funds to be distributed to causes and organizations that you believe in. Your will is a clear way to state your wishes and where you would like these funds to be donated.
Give Funeral Service Instructions
If you have certain desires for your funeral service, you can include them in your will. You can also name a funeral executor. This should be someone you trust to carry out your wishes and manage the funeral process as you desire.
What Happens if I Don't Have a Will?
If you pass away and do not have a will, what happens varies from state to state. In the state of Illinois, it is dependent on if you are survived by a spouse and/or descendants.
When there is not a will, the state must appoint someone to manage your estate. This person will direct the process and your family will need to work with them to gain access to your assets.
If you pass away without a will and have both a spouse and descendants still living, your spouse would inherit one-half of your assets. Your children would inherit the other half.
Everything goes to your spouse if you are only survived by them. And if you are survived by only descendants, no spouse, your assets would all be inherited by them.
In Illinois, if there are neither surviving descendants nor a spouse, the line of descendants will be used. If you have surviving parents, siblings, or even descendants of siblings, they will be contacted. When your surviving descendants are notified, your assets are divided amongst them.
However, it is also possible there may be no surviving family members in these family groups. If this is found to be true, the lines of inheritance go to the paternal and maternal lines, with half of the assets going to each side. If there are no surviving family members on one side, all of the assets will be inherited by the other side of the family.
If there are no surviving family members found on either side of the family, the assets are then the property of the State of Illinois. Any property included in this goes to the county the deceased lived in.
What Might Be Found in a Will?
A will may include appointments for who you want to manage your estate, as well as who you want to be the guardian of your children and pets. Other things to consider addressing in their will are their home, any life insurance they may have, retirement plans, and bank accounts.
Here are some things to consider when thinking about creating a will:
- Who would you like to be the executor of your estate?
- Who will be named the guardian of your children (if they are minors)?
- Who will be the guardian of your pet(s)?
- Who would you want to receive your property?
- If you are leaving your property to your children, at what age would you want them to receive it?
- Do you want to leave money to any charities?
What Does a Will Not Do?
There are a few things a will does not control. These include things like any property that you are a joint tenant of and property that is payable to a specifically designated beneficiary.
Wills also do not include property that may be subject to a transfer on death deed. And they do not cover any property held in a trust.
It is important to note that if you have already designated beneficiaries for your accounts, these will take precedence over your will. For instance, if you list your wife in your will as who you want to receive your life insurance benefit upon your death, but have your children as the beneficiaries on your policy, the policy will be followed.
Do I Need to Review My Will?
Once you have created your will, as long as it follows state regulations, it is binding. However, should you add a property or make big life changes, such as having another child or getting a divorce, you may want to consider reviewing your will with your attorney.
Here are some questions to consider when reviewing your will:
- Have you added children to your family?
- Has your marital status changed?
- Have any of your currently listed beneficiaries died or changed?
- Have you had any major change in circumstance or assets since you last reviewed your will?
What is a Living Will?
A living will is a document that gives directions on how you desire medical treatment to be carried out should you no longer be able to express consent yourself. It is especially important that a living will contains your desires regarding life-sustaining medical procedures.
A living will should be specific as to treatments you would want and would not want. Here are a few types of medical decisions to consider when putting together a living will:
- Cardiopulmonary resuscitation (CPR)
- Mechanical ventilation
- Tube Feeding
- Palliative Care
- Organ/tissue Donation
What is Power of Attorney?
Another consideration to think about, especially toward the end of life, is putting together a power of attorney. A power of attorney, also called a durable power of attorney, is a document that allows a trusted person to act for you should you become unable to act for yourself.
Many of us do not want to think about this, but it often occurs that people have a period before death where they become incapacitated. A power of attorney allows a trusted person to manage your financial affairs in your stead.
Healthcare power of attorney is also available to allow a trusted person access to make medical decisions for you. This person will advocate on your behalf should there be any disagreement about the course of treatment or your care in general. You may also name one or more alternative persons in your power of attorney paperwork in case the original person is unavailable.
Who Might Need a Will?
Everyone should have a will as it allows you to name to who you would like your assets to transfer. Without a will, your loved ones will have to go through a lengthier probate process which can be quite stressful.
It can also provide peace of mind for you as you will know your assets will be distributed as you desire. Even if you feel you do not have many assets, they should be handled with dignity and according to your wishes.
What if I Want to Write My Will Myself?
It is possible to write a will yourself, however, you do need to be careful to make sure to follow all guidelines set by the state to be sure your will is going to be valid and binding.
Here are a few typical issues people run into when they attempt to write a will without professional guidance:
- Not including enough witness signatures
- Not properly authenticating the witness signatures
- Not asking the witnesses to include the necessary acknowledgments (finding the will signer to be of sound mind, etc)
- Not using the form required by the state of Illinois
- Not including necessities that later require their family to spend time and money going through probate or needing to seek legal counsel
What Is Probate?
Probate is the process of identifying and carrying out the wishes of the deceased as laid out in their will. It is supervised by the state court which appoints an estate executor based on who is named in a person’s will. If there is no will, the state may appoint someone the family nominates or they may appoint a state-chosen representative.
What is a Probate Case?
When there is no will, or the will cannot be located, a probate case is opened by the state and an administrator is appointed to manage the asset distribution.
Another time a probate case may be open is when a will is contested. If this occurs, there may be a court hearing that takes place and the court may be involved for the duration of probate.
How Long Does Probate Take?
The probate process can vary widely depending on your unique situation. Here is a general timeline of the probate process:
File the Probate Petition (1-4 months)
The probate process begins when you file the petition to begin the formal probate period. This typically includes submitting the correct paperwork to the probate court.
Notify Creditors and Beneficiaries (1-4 months)
The next step in the probate process is that all creditors and beneficiaries must be informed. Creditors must be given proper notice, as some may require written notice. You will need to check with each creditor to determine their guidelines.
Post a Public Notice (6 months)
In Illinois, the estate’s representative must also publish a public notice regarding the death in the public newspaper. They must then wait through a six-month waiting period before moving to the next step in the probate process.
Administration of Assets (3-9 months)
Once the debts have been determined, the administrator of the estate will have a firm idea of what is owed. The executor will sell any assets necessary to pay these debts. Any remaining assets will then be distributed to the beneficiaries.
Closing of the Estate (4-24 months)
When all of these tasks have been accomplished the receipts are filed with the court along with a request for the estate to be closed. The executor of the estate is responsible to keep records of all transactions during the probate process to be submitted with this report.
In total, it is estimated that the quickest of probate cases takes at least nine months and costs several thousand dollars by the time it is completed.
Navigating the Probate Process
Because this is such a lengthy process with so many steps, many people choose to work with an attorney familiar with the probate process. As you can see, if there is a will in place it can the probate process a much smoother and quicker process. A will can save families a lot of unnecessary stress during an already trying time.
Wills vs Trusts
There is another option that many people are not as familiar with, however. And that is setting up a trust. A trust may allow your family to skip the probate process altogether.
What is a Trust
A trust is an instrument that allows one person, the trustor, the ability to give another person, the trustee, property title and assets to hold for a third party, the beneficiary. The reason trusts are created is to provide both legal and tax protection for the trustor and their assets. A trust also helps to make sure these assets are handled specifically as the trustor designates upon their death.
There are different types of trusts that can be established, but they can be simplified into these categories:
Living or Postmortem Trusts
Living trusts are created to allow an individual’s assets to be given as a trust to another person during their lifetime. The person’s assets are wholly transferred to the beneficiary when the trustor (who created the trust) passes away.
Postmortem trusts, also known as testamentary trusts, are set up to give away a person’s assets after one’s death. This is similar to a will, but we will explore how it differs below.
Revocable or Irrevocable Trusts
Revocable trusts can be modified or even terminated if the trustor should choose to do so while they are still living. Only the person who created the trust may modify this type of trust. It allows heirs to minimize the probate process, so preparing your estate at the time of your death is much easier on your loved ones. The one thing to think about with this type of trust is that it does not allow your beneficiaries any control over what they will inherit.
Irrevocable trusts, on the other hand, cannot be modified once created. They are also completely irrevocable once the trustor is deceased. This type of trust minimizes estate taxes and protects your assets from creditors. Irrevocable trusts also have options available to allow trustors to provide for minor children, disabled family members, or other financially dependent loved ones. The main consideration with this type of trust is that you must retitle assets to the trust, so they are no longer yours but belong to the trust.
Postmortem trusts are always irrevocable. This means that once the trustor has established the trust, whatever is set forth within it will stand. The considerations with this type of trust are that it does not take effect until you pass away and it does pass through probate court.
Funded or Unfunded Trusts
Trusts can be set up to include a monetary amount chosen by the trustor. The trustor would add monies to the fund over the course of their lifetime. This is considered a funded trust.
An unfunded trust is just the opposite, a trust that includes no monetary funding. It may become upon the death of the trustor, but not necessarily. It may remain unfunded, however, this is not common.
There are several other types of trusts such as charitable trusts, qualified terminable interest property (QTIP) trusts, joint trusts, and more. Seek professional advice if you would like in-depth explanations of these more specialized types of trusts.
Reasons to Have a Trust
While many of us think of trust funds just for the ultra-rich, there are many purposes for trusts. Here are a few that we should all consider:
To Protect Property
Trusts are a legal way to allow someone to hold property in order to protect it from lawsuits, divorce, etc. Irrevocable trusts will also protect property from Medicaid laws as the trustor has legally assigned the property to another and no longer owns it.
To Ensure Privacy
In Illinois, your will is required to be filed with the county clerk. This means that your last will and testament become public record. Trusts, however, are not required to be public record.
You may also add provisions to your trust that do not allow beneficiaries to file lawsuits and limit the information they receive regarding you and your trust. Each of these would also help to ensure your privacy even after your death.
To Avoid Probate
If your assets are held in the correct type of trust, your family would not need to go through the probate process. Your beneficiaries would have immediate access to the assets assigned to them in the trust. Your attorney can help you choose the type of trust that works best for you and that will help you avoid probate.
To Divide Assets Fairly
When estate planning, some things are harder to split between beneficiaries than others. In the instance of a family business or vacation property, you may find it difficult to divide evenly or leave it to one person. A trust makes it simple to leave detailed instructions on how these more complicated assets should be divided.
To Provide for Loved Ones
There are many unique cases that can be laid out in a trust such as a beneficiary with a disability. A trust would allow you to set aside monetary means for this loved one without limiting their ability to receive state or federal aid.
Sometimes we must also make allowances for loved ones who are either too young to manage their own finances or who are adults, but who may struggle to manage money. With a trust, you can appoint a trustee, a person to help distribute the funds. You can also choose to set up special rules within the trust as to how the money may, or may not, be used.
To Reduce or Avoid Taxes
It is possible to sizably reduce your state and/or federal taxes legally by transferring assets to beneficiaries. This is called an “estate tax exemption.”
In 2020, the Illinois estate tax exemption amount was $4 million. This exemption can include investment/retirement accounts, life insurance policies, and other assets. These can be transferred, up to $4 million, at your death, without tax consequences.
In contrast, the federal liability in 2020 was $11.58 million. There is also a marital exemption that is unlimited at both the Illinois state and the federal level. This means if you leave your entire estate to your spouse, there are no tax liabilities.
Funding a Trust
To get the most out of a trust, it is best to fund a trust throughout your lifetime. This is done by transferring ownership of your assets to the trustee of your trust. It can also mean changing beneficiary designations to name the trust instead of naming a specific person or persons.
Here are some of the common assets trusts are funded by:
- Bank Accounts
- Securities (stocks, bonds, brokerage accounts)
- Certificates of Deposit (CDs)
- Business shares
- Life Insurance policies
- Retirement Accounts
Your attorney can assist you in transferring ownership of property and other assets to your trust. Once your assets are owned by your trust they are protected from probate.
If you create a trust, but do not retitle property or other assets to the trust, the manager of the trust will not be able to actually implement your wishes laid out in the trust. These assets outside the trust may still have to go through the probate process. If you have not left a will to be followed, the state may follow the intestate succession process as outlined above.
How Do I Set up a Trust?
A trust is more versatile than a will and can contain many types of instructions as well as the entirety of your assets. Here are some things to consider before you put together your trust:
List Your Assets
Making a list of your assets will help you and your attorney as you make plans to divide your estate and designate beneficiaries. Your assets include all of your tangible and intangible possessions. Think through big things like your house, cars, and jewelry. Then think through intangible things like your 401K, stocks, and any life insurance policies you may carry.
Before you talk with your attorney you will want to put together all the paperwork for your assets. Locate titles, deeds, life insurance policies, etc, so you can present these to your lawyer when you meet. Your assets are transferred to the trust to fund the trust. Your attorney will need this paperwork in order to begin the transfer process.
Choose Your Beneficiaries
Take the time to think through who you will want to list as your beneficiaries in your trust. These can include anyone you would like – family members, friends, and even charities that would like to leave assets to.
Another consideration might be if there are specific people you do NOT want to leave assets to. This can also be specified in your trust and you can consult with your attorney on how to do so.
Be sure to discuss any beneficiaries already listed on insurance policies or 401K documents, etc. They can advise you on how to proceed with this process and if any changes need to be made.
Consider a Successor Trustee
Throughout your lifetime, you are the trustee of a living trust. This means you have control over the trust and, if it is a revocable trust, you can make modifications.
Upon your death, whoever you choose as successor trustee will pay any debts you leave behind and manage the distribution of your assets.
Do I Need a Trust if I Have a Will?
You may need a trust if you have a will and want additional control over certain aspects. A will allows you to name beneficiaries and it gives you the ability to state to who you would like your assets distributed.
A trust, however, gives you much more control over how your wishes are carried out. You can write specific conditions into a trust, such as giving your beneficiaries no leeway for lawsuits to be filed, requiring that only specific information is to be given out to beneficiaries to keep your privacy, designating assets to every child if you have a complex family system, and much more.
Trusts might also be necessary if those with large blended families want to be certain every beneficiary is sufficiently cared for.
What Is Better in Illinois a Will or a Trust?
In Illinois, a trust gives you significant tax benefits. When set up properly, a trust will also help you avoid probate entirely. This allows your loved ones to avoid the significant time and costs associated with probate. It also means your beneficiaries will receive the assets meant for them almost immediately.
A trust can also keep the assets that your beneficiary receives safe from their creditors. If you are concerned that any inheritance you leave your loved one may go straight to unpaid credit card bills, a trust can prevent this. A trust allows the ownership of the assets to remain within the trust. Therefore, your loved one will have access to the trust, but their creditors will not be able to use that money against them.
You can also administer your assets for your minor children with a trust. If you leave money to a minor child with a will it can cause issues as they cannot act on their own behalf financially. This means the court would need to appoint a representative to act on behalf of the child. With a trust, you can lay out exact directives on when and how you want assets managed for your child. This will keep the court from needing to be involved.
A trust is a great way to care for loved ones, reduce estate taxes, and leave no questions as to your wishes.
Are You Ready to Reap the Benefits of Setting up a Trust?
Putting together a trust can be a daunting process, but the many rewards outweigh the stressors. Thankfully, Prime Law Group have experienced lawyers that can help you draft an estate plan which addresses your needs.
We would love to answer any questions and are happy to share more about what is the difference between a will and a trust.
If you would like to learn more about estate planning, we would love to help you. Contact us today for a free consultation.