A Will or a Living Trust?
The short answer is you are not required to have either, but you should have at least one, and as is explained below, it's a good idea to have both. The most common type of estate plan includes four documents: (1) a Revocable Living Trust, (2) a Will, (3) a General Durable Power of Attorney, and (4) a Patient Advocate Designation.
A Will is simply a document that states who you want your property to go to upon your death. Without a Will, your property will be distributed pursuant to State law, which may or may not match what you want to have happen. In addition to divvying up your property, a Will can also to the following:
- Name a Personal Representative to be appointed by the Probate Court (the "Personal Representative" is the person who will manage and distribute your property in accordance with your Will).
- Nominate a Guardian for minor children.
- Nominate a Conservator to manage property left to minor children until they reach the age of 18.
- Make specific gifts of property to specific individuals (e.g., "I want my daughter Karen to receive my diamond earrings.").
A Will does NOT avoid the probate process - generally, "probate" is the legal proceeding necessary to transfer any property owned by a deceased person after they die. While probate is usually not the bogeyman many make it out to be, it can sometimes be costly and slow, and can involve significant paperwork and even court appearances by lawyers or even extended litigation. Any attorney fees and court costs incurred by your "probate estate" or the Personal Representative are paid from your estate property - property that would otherwise go to your loved ones.
There is no magic language required to create a valid Will. The requirements for a valid Will are as follows:
- The person making the Will (the "Testator") must understand what he or she is doing (called "legal capacity").
- The Will must identify the Testator as the person making the Will.
- The Will must identify who is to receive the Testator's property.
- It must be signed by the Testator in front of two witnesses (who must also sign the Will as witnesses).
- NOTE: Michigan law does not require that a will be notarized. However, Michigan law allows for "self-proving" wills (meaning the Probate Court does not have to contact the witnesses or have them testify). In order for a Will to be self-proving, it must be signed by the Testator and the two witnesses in front of a notary public and notarized as such.
One major weakness of having only a Will is that it will only take effect upon your death. A Will is of no help in the event you become incapacitated.
A trust is a legal fiction - it is a creation of the law and only exists in the law, not unlike a corporation or an LLC. A trust is unique in that it is an arrangement under which a person (the "Trustee") holds property for the benefit of another person or group of people (the "Beneficiaries"). A "revocable trust" is revocable or modifiable during your lifetime; a "living trust" is simply a trust that you create while you are alive, as opposed to a trust that is setup to take effect at your death (called a "testamentary trust").
A Revocable Living Trust (RLT) is the most common type of trust used in estate planning. An RLT is comparable to a bucket that you put all your stuff in. You carry the bucket (control it), and you can add or remove items from the bucket as you wish. Normally the person or couple creating the RLT will serve as Trustee(s) during their lifetime and capacity. The property held in an RLT can be freely sold, transferred, gifted, or borrowed against by the Trustee. Additionally, RLT's typically have no tax effect, as IRS regulations disregard the RLT and treat trust property as still belonging to the creator. This means the trust does not file its own tax return, and simply uses the creator's social security number.
Some benefits of a trust are as follows:
- Avoiding Probate - Property held in trust is not subject to probate upon the creator's death.
- Privacy - A trust and the transfers made under it remain private, unlike a probate proceeding which is a public legal proceeding. The privacy of trusts has gained increased importance as information has become more and more freely available.
- Asset Protection - When set up correctly, a trust can protect assets from creditors of the trust beneficiaries. But although it may protect your kids' inheritance from their creditors, a revocable living trust will not protect the trust assets from the creator's creditors.
- Incapacity - Trusts provide opportunity for much more control and instruction about how trust property and affairs should be managed in the event the creator becomes incapacitated.
Avoiding probate court proceedings can save your family time, money, and headaches. An RLT is the only technique that allows you to avoid probate for pretty much any property you might own: real property, vehicles, heirlooms, bank accounts, jewelry, and more.
The benefits of a trust generally come at your death, at which point the person you name to takeover for you as trustee (the "Sucessor Trustee") will be empowered to distribute the trust property to the trust beneficiaries that you name, without any probate court involvement.
In a trust-based estate plan, the creator will still have a Will, but the Will serves as a catch-all to sweep any property into the Trust that might not have been placed in the Trust during the creator's lifetime. The Will is called a "Pour-over Will," because it simply pours any property still owned by the deceased into the Trust to be dealt with and distributed in accordance with the terms of the Trust.
As I mentioned at the beginning of the this post, you should at least consider making a Will setting forth your wishes. Michigan has a "statutory will" that can be used by anyone to create a will without an attorney. The Michigan Legislative Service Bureau has an excellent publication, called Planning for Peace of Mind, that walks through making these types of medical and legal decisions.
Creating an estate plan doesn't have to be complicated. Like saving for retirement, making arrangements for yourself is not required, but it is highly recommended, and will certainly be appreciated by your loved ones.
For a free estate planning consultation, call my office at (616) 920-1932 or email firstname.lastname@example.org to schedule an appointment.