Wills and trusts have specific and quite different benefits for estate planning purposes. Each state has specific laws and regulations governing these legal documents, so this information is about Wills and Trusts created under Michigan law. You can have both a Will and a trust; however, the information in each should compliment the other. As a standalone, it is not accurate to say one is better than the other. The better choice for you, or a blend of both documents, depends on your assets and personal circumstances. Begin by assessing your situation, goals, and needs, and understanding what Wills and trusts do to guide your decision making. Then, along with an attorney, you will be able to identify the solution that best suits and protects your family.
At its most basic level, a Will allows you to appoint a personal representative (executor) for your estate, name guardians for your children and pets, designate where your assets go, and specify final wishes and arrangements. A Will is a legal instrument that you create while you are alive, but it only has legal effect upon your death. As such, a Will is not a legal instrument to provide management of your assets in the event of incapacity. A Will is a legal instrument that is designed to work with the probate court process in that it informs the court who you want to settle your estate and inherit your property. The reason there is a need to probate someone's estate at death is not because they have a Will or do not have a Will. Rather, probate is necessary at death if the now deceased person owns an asset or account that is titled solely in the deceased person's name and it is the type of asset or account for which a beneficiary cannot or was not designated.
Different Types of Wills:
The Last Will and Testament designates a person's final wishes about bank accounts, real estate, personal property, and who should inherit these and other items and assets. If you have minor children, a Will is where you designate a guardian for them. Even though the legal instrument is referred to as the Last Will and Testament, you can always make another Will which would then be your Last Will and Testament.
A pour-over will distributes the deceased person's assets to a previously established trust upon death. This type of Will always accompanies a trust and is a safeguard in the event that trust funding was not completed.
A living will or advance directive specifies the type of medical care that an individual prefers if they cannot communicate their wishes. In Michigan, these are provisions within a Patient Advocate Designation in order to avoid confusing Wills to distribute property at death with medical decision making in the event of incapacity.
A joint will and mutual will is meant for a married couple to ensure that their property is disposed of in an identical manner. A mirror will is two separate but identical wills, which may or may not also be mutual wills. This technique is not favored in Michigan where the standard practice is for the married couple to each have their own Wills.
A holographic or handwritten will can be valid in Michigan, but poses a risk of being written unclearly, not disposing of all of your property, and therefore not be legally or practically effective. Due to their informal nature, the use of a holographic or handwritten Will increases the chance that there may need to be one or more hearings scheduled in front of the probate court judge where the judge reviews the Will and takes testimony to determine if the holographic or handwritten Will is complete, understandable, and legally valid. The costs of these legal proceedings to determine the validity of a handwritten Will often substantially outweigh the cost of having a written Will prepared by an attorney.
Wills become irrevocable when you die. Wills can range from the simple to the complex depending on your situation, the nature of your estate, and what you are trying to accomplish. Estate tax reduction planning can be accomplished with Wills, but since those tend to be more complicated situations, people will often opt for a living trust plan with estate tax provisions in order to avoid settling their estate in probate, which occurs with Wills.
In regard to Trusts, they are separate legal entities you create while you are alive that may have legal effect while you are alive as well as after your death. Generally, a trust provides for the distribution and management of your assets during your lifetime and after death. Trusts can apply to any asset you hold inside the trust and offer more control over when and how your assets are distributed. There are many different trust provisions and types.
However, the creation of a trust is only the beginning of the process. You must fund your trust by legally transferring assets into it, making the trust the owner of those assets. This process makes creating a trust a bit more complicated to set up; however, a trust is often enacted to minimize or completely avoid probate, thus allowing for your estate to be settled more informally, outside of the probate court process. There are nearly as many types of trusts as issues to address in estate planning, and each offers different protections. However, trusts generally fall into three basic categories.
First, a revocable living trust is, by far, the most commonly implemented trust type. The person who creates and funds the trust is known as the settlor and will typically act as the trustee during their lifetime. The trustee is the person designated in the trust to mange the trust property under a fiduciary standard. The settlor may undo the trust, change its terms, and move property and assets in and out of the trust's ownership as they deem desirable. In a nutshell, revocable living trusts are usually created to provide for management of assets upon incapacity and distribution of your estate upon death, both outside of the probate court process. Revocable living trusts become irrevocable trust upon the death of the settlor (because he or she is no longer around to change it).
Second, an irrevocable trust is one where the Settlor transfers property to the trust and either gives up the right to draw on the income generated by the trust property, or remove the property in trust, or both. While some provisions in an irrevocable trust can be changed, such as who the trustee is or who inherits the property in the trust upon your death, for the most part, the other provisions in the trust cannot be changed, hence the irrevocable aspect of these trusts. Irrevocable trusts include Medicaid Asset Protection Trusts, which are designed to avoid spending down the assets in the trust in the event that you need long-term care in a nursing home and what to qualify for Medicaid to help pay for it. There are unique tax implications and other benefits to an irrevocable trust, including protecting a person's home and savings from the high costs of long term care. These benefits can make relinquishing some control worthwhile.
Third, a testamentary trust is a provision within a Will, appointing a trustee to manage the deceased person's assets. This trust is often used when the beneficiaries are minor children or someone who is receiving Medicaid. This trust type is also used to reduce estate tax liabilities and ensure professional asset management. A testamentary trust is not a living trust. It only exists upon the death of the testator (the writer of the Will). The personal representative of the deceased's estate would follow the terms of the trust (called administering the trust) as part of the probate process.
Things to consider putting into a trust include but are not limited to:
- Stocks, bonds, mutual funds
- Money market accounts
- Brokerage accounts
- Patents, copyrights, and royalty contracts
- Homes and other real estate
- Business interests and notes payable to you
- Jewelry and precious metals
- Works of art or other valuable collections
Assets that are easier to pass outside of a trust include but are not limited to:
- Life insurance proceeds, unless the person you want to inherit it is young or incapacitated
- Payable on death bank accounts
- Retirement accounts such as IRAs or 401(k) plans, unless the person you want to inherit it is young or incapacitated
- Jointly owned assets
- Real estate subject to transfer-on-death deed
However, whether a particular type of asset or account should be titled in a trust (or whether the trust should be made the beneficiary of the asset) is very fact specific to one's individual situation and involves income tax and asset protection considerations.
The many benefits that proper estate planning with Wills and trusts can provide to you and your family are worth some thoughtful contemplation, legal counsel, and properly drafted documents. I would be happy to discuss are best for your particular situation, so feel free to contact me.