This is a source of confusion for a lot of people. I often have clients ask me this question, or the related questions “Which one do I need, or do I need both?” Here’s the breakdown of what each document is, and what purpose it serves in your overall estate plan:
The will is the document that states where your estate goes when you die (“estate” = everything you own in your own name). It also says who is in charge of making sure everything gets to where it is supposed to go – this person is called the “executor” (or “executrix” if the person is a woman). Lastly, the will names the legal guardian for any minor children.
It’s important to know the limitations of a will. Certain things are not covered – for example, life insurance contracts or IRA accounts. These pass by contract to your named beneficiaries, so they are considered to be outside of a will’s control. There are cases where a person stated in their will that they wanted their life insurance proceeds to go to someone besides their named beneficiary on the life insurance policy (often an ex-spouse), but they failed to update the policy. The courts have consistently ruled that the named beneficiary on the policy controls, despite what the will states – and that’s how the ex-spouse gets the life insurance proceeds.
A will also does not avoid probate, where the government oversees the distribution of the estate. Probate is required in California whenever the estate is worth more than $150,000 (though that number will rise to $166,000 in 2020). A will can streamline the probate process, but it will not avoid it entirely.
Lastly, the will cannot hold assets for any length of time; it can only direct where the assets go. If the assets can’t be distributed right away (for example, the beneficiary is still a minor), they will have to be held in a trust.
The trust is similar to a corporation in many ways. It is a legal entity, the same as a corporation, so it can own property and hold assets in its own name. This allows a person to avoid probate – if property is owned by the trust, then it is not counted as part of the estate. If the trust owns the majority of the person’s assets (for example, the house), and what’s left in the estate is worth less than $150,000, probate can be avoided.
A trust can also hold assets over a long period of time, unlike a will. If a beneficiary is a minor, or is simply irresponsible with their money, the trust can manage their inheritance for them until certain conditions are met (for example, reaching a certain age), or even indefinitely – though it would be wise to make sure your trustee is on board with managing a trust with no definitive end date.
Lastly, a trust is private, unlike a will. California law requires all original wills to be filed with the local Probate Court within 30 days of the person’s death. While these wills are usually not viewable online, they are public records and can be accessed by anyone who wants to look through the files of the Probate Court (which is how someone acquired copies of the wills of Frank Sinatra and Marilyn Monroe to post online, and why I can provide copies to subscribers of my newsletter). There is no such requirement for trusts, so they can remain out of the public eye and be administered quietly.
So how do these two documents work together?
If you’re only going to have one document, it should be a will. A will is useful regardless of how much a person has. If you have minor children or want to avoid probate, you should also have a trust. When a person has both documents, typically the will directs all assets in the estate to go to the trust. This serves as a safety net, so that anything that was not put into the trust during life can still get there post death. The trust then directs the trustee on how, where and when to distribute these assets.
If you are still confused, you are welcome to email me at email@example.com.