What is a will?
A will, formally known as a last will and testament, is a legal document that allows you to dictate how your estate should be handled when you die. Assets transferred by will go through a process called probate, which takes place in county court. As long as nobody contests your will, informal probate usually takes about 4 – 6 months to settle your estate and transfer your assets to your beneficiaries. You can also use a will to select a guardian for your children, and to nominate an executor to manage your estate.
What is a living trust?
A trust is a legal entity that can hold, manage, and distribute assets. When you (the grantor) transfer assets to the trust, those assets become the property of the trust. You can transfer just about anything to a trust—bank accounts, stocks, bonds, mutual funds, real estate, vehicles, and even personal property such as art, collectibles, and jewelry.
Every trust has three key elements: a trustee to manage the assets, a beneficiary to receive the assets, and a trust agreement that establishes the terms of the trust. A trust can be revocable, meaning it can be amended or dissolved by the grantor, or it can be irrevocable, which prohibits any changes to the terms of the trust once the document is signed. Because of this, assets transferred to a revocable trust are still considered part of your estate, and assets transferred to an irrevocable trust are permanently removed from your estate. In either case, the assets inside the trust will transfer to your beneficiaries without going through probate.
A living trust simply means the trust is established during your lifetime. It doesn’t matter whether it’s used to gift assets to your children, to minimize your exposure to estate taxes, or to avoid probate—all of those are forms of a living trust. In contrast, a testamentary trust is established after your death, usually by instruction in your will.
With that understanding, there are a couple of similarities between a living will and a living trust. Both provide direction for your assets when you die, and both allow you to name beneficiaries to receive your assets. Outside of that, however, there are some big differences that will impact which you should use with your estate plan.
The biggest difference between a will and a living trust is a trust’s ability to bypass probate. Unless you qualify for a small estate exception, your heirs will have to wait at least 4 – 6 months to receive their inheritance. If anyone contests your will, the process could take significantly longer. Probate also comes with additional legal fees, which can erode the final value that’s available to transfer to your heirs.
To get around the hassle, transfer assets to a living trust, and instruct the trustee to transfer the assets to your beneficiaries when you die. You can even place additional stipulations on the distribution, such as withholding access to the principal value until the beneficiary turns 18, or mandating that trust assets can only be used for higher education expenses.
Avoiding estate taxes
Most Americans don’t qualify for estate taxes, but for those with assets valued over $5.49 million, estate taxes are a major concern. With tax rates as high as 40%, this has the power to seriously erode your assets. If you transfer assets to an irrevocable trust, though, those assets will be removed from your estate. Ideally, this will minimize your exposure to estate taxes. A will does not offer the ability to address estate taxes.
Creating a trust is usually more expensive than drafting a will. However, due to the costs incurred through probate, a trust can end saving you more money in the long run.
Probate is a public court process, which means a will becomes publicly accessible during the proceedings. Any assets and beneficiaries named in your will would become public knowledge. A trust, on the other hand, will not be made public, and ensures privacy for your assets and your beneficiaries.
Nominating an executor
An executor, or personal representative, is the individual you choose to manage the affairs of your estate. This person will have full legal authority to access your financial accounts, pay your bills, settle debts, and transfer assets to your beneficiaries. If you don’t nominate an executor, a probate judge may be required to appoint a third-party administrator to fill the responsibility.
A will allows you to nominate an executor and a backup executor (in case the primary nominee dies before you). A trust lets you designate a trustee to manage the assets inside the trust, but does not allow you to name an executor for your estate.
Naming a guardian for minor children
If you have minor children, you need a will to select a guardian to care for them in the event of your untimely death. Just as with naming a backup executor, you can also designate a backup guardian if your primary choice is unable to care for your children. Unfortunately, a trust does not let you select a guardian.
Gifting assets to minor children
Minors cannot own property, so any assets you transfer to a minor through your will is going to require a court-supervised conservatorship to hold the assets until the minor turns 18. The best way to get around this is to establish a trust for the minor. In that case, the trustee can distribute income for the child, and when they turn 18 the child can receive all of the assets.
Preparing for incapacitation during your lifetime
This is an often-overlooked aspect of estate planning. If you become incapacitated, you’ll need someone who can handle your affairs until you die. This individual will need the authority to access your financial accounts, pay your bills, and make important decisions on your behalf. With a trust, you can appoint a disability trustee who can step in to help you in these situations.
Typically, the disability trustee has no authority until you become medically or mentally incapacitated. Until then, you would retain control over your assets. A will, on the other hand, cannot properly plan for this scenario.
Updating your estate plan
Most estate planning attorneys hold an annual review with their clients to determine if any changes to their plan are necessary. Major life events such as the birth of a child or purchasing a home will usually require some changes. A will is fairly simple to update, but a trust is extremely difficult to amend—especially if it’s an irrevocable trust. Depending on the situation, you may need to dissolve a revocable trust and draft a new trust agreement.
Leaving money to care for pets
This probably isn’t much of a concern for most people, but to those who consider their pet a member of the family, it may be worth considering. Pets can’t own property, so you can’t gift money to a pet in your will. Pets can be the beneficiary of a trust, though. A living trust would allow you to set aside funds to care for your pet, along with a trustee (who will probably double as the pet’s new owner) to distribute assets for the pet’s benefit.
Do You Need Help with Probate Matters?
As you can see, the probate process in Arizona is complex. It requires a number of steps and without the right approach, it’s easy to get lost in the details. At JacksonWhite, we can make probate a clear, easy-to-understand process. If you’d like help with probate matters, call the talented team at JacksonWhite Law today. We can help explain your legal options and direct you to the probate solution that works for you and your loved ones.