It’s likely that you’ve run across the terms “Will” and “Trust” before in your life, but could you adequately define and describe the difference between the two phrases? While the two terms are often believed to similar in nature, it’s important to understand the definitive differences in order to best plan for your future.
What is a Will?
When you pass away, the question of “what happens to all of my belongings?” needs to be answered or sorted. If someone passes away without a will, it means they die “intestate.” When this happens, the intestacy laws of Oregon or Washington will determine how property should be distributed. Typically, it will be split amongst living heirs—if no living family members can be identified, the belongings will go to the state.
But what if you want to have more control over your belongings and how they will be divided amongst family or friends? What if you want to ensure your children inherit a certain amount of your money left behind, or that special heirloom ring you love so much goes to your grandson for a future proposal? In order to have control over the division of your fortune after you die (no matter how big or small), you can create a will.
A will is a document that allows you to communicate your last wishes and how you would like to see your assets shared with your family after you’ve passed away, as well as name a guardian for children (which must ultimately be approved by the court) and state funeral preferences, amongst other requests. It provides specific instructions for how you would like your belongings to be handled after death. A will becomes active as soon as you pass away, where it then becomes the appointed designated personal representative’s responsibility to follow your written requests and ensure that all beneficiaries (people who were named in the will) receive their share.
It should be noted: certain requests in your will may need to first be approved by the court. For example, you can state who you wish to become the guardian of your children, but ultimately this is a decision the court must review and approve—if that person you requested is not deemed fit for guardianship, the court will find someone else they consider more suitable for placement. For this reason, it’s always recommended that you list multiple people as possible guardians, as well as multiple personal representatives, in case your first or second choice are not able or willing to carry out the requests.
Another aspect to understand about a will is that it must pass through probate. This just means that a court will need to oversee the administration of the will, and that it will become a part of the public record. This can cost time and money, but is necessary to ensure the will is valid and is properly distributed.
What is a Trust?
A trust is a legal entity that is given life and authority by the state, and is typically created as a means of holding money or property for the benefit of another person or organization.
Think of it this way: say you want to set aside money for your future grandchild to help pay for their college education, but you want to ensure that that money doesn’t get used for any other person or purpose. You, as the grantor, can create the trust and transfer the money (say you want to transfer $40,000). At that point, the trust becomes like a living entity that then owns the money. It’s no longer considered your money, however as the grantor you can establish the terms upon which the cash must be managed (say, at the age of 18 your grandchild, also known as the beneficiary, starts to receive $10,000 a year that can only be applied to their education). When you create your trust, you must appoint a trustee (an individual or an institution who holds the legal title to the trust property) who will then be responsible for ensuring the terms of your trust are carried out accordingly. Unlike a will, a trust does not need to go through probate, and can remain a private matter between the trustee and the beneficiary.
In this way, a trust is an invaluable resource to build wealth for future generations while having control over how and when it’s distributed—whether you’re dead or alive. A trust goes into effect as soon as it’s created and funded, and can be used to begin distributing property or money before or after death, whereas a will only goes into effect after you pass away. In addition to this, a trust allows you to have more control over how your fortune is spent after you pass, rather than just handing it over.
For example, say you have an adult child who has a substance abuse problem. You want to be able to support them after you pass, but you also want to ensure they don’t receive a large sum of money that could be mismanaged and used for drugs or harmful habits. Whereas a will can ensure they receive the money, it has no control for how they spend that money. A trust, on the other hand, could be created with established terms that state your child’s rent is covered and payed for every month, but that they don’t receive loose change for recreational use. In this way, you can offer support to loved ones while ensuring your money is spent in a way that you would approve of.
Both a will and a trust are great resources for protecting your assets and ensuring your fortune is handled and distributed in a satisfactory way, whether you’re alive or dead. If you’re interested in either of these, it’s hugely important you understand any legal implications involved, and that you hire an attorney to help you create them correctly the first time around. Call Landerholm Law today to set up a consultation at (503) 227-0200.