Do you need a will or a trust (or neither)?
One of the easiest ways to understand the difference between a will and a trust is to look at what would happen upon your death if:
- You did nothing
- You do something like co-ownership
- You do a will only
- You do a will and a trust
Can you get away with doing nothing?
Yes, it’s possible that you could get away with doing nothing.
And by that, what we mean is maybe you don’t need a will, maybe you don’t need a trust.
The big elephant in the room that most people want to avoid upon death is expensive, drawn-out court battles.
Assets that end up in probate – at the very least – will take up your beneficiaries’ time and money, and at the most can lead to disputes that hurt those involved.
We would usually advise you to have at least one (will or trust) because it’s not that expensive, it’s pretty simple to do, and it helps reduce the risk of problems in court. But there have been instances where a client doesn’t want either.
When would that make sense to not have either?
It could work fine if you ONLY have accounts.
Let’s say you only have a 401k and a bank account – or you have accounts where you can designated beneficiaries as part of those accounts, and those beneficiaries are assigned with enough backup beneficiaries to where if those beneficiaries die before you, your accounts are going to go to the people you want.
Now you… and by you, I mean your beneficiaries… typically can’t avoid probate if you have any form of real estate. Even cars can cause probate. So, not a great idea to skip a will or trust once you start having property involved.
What about Co-Ownership?
The next alternative that passes assets more seamlessly than doing nothing – but isn’t a will or trust – would be co-ownership.
We get this question often from more sophisticated clients who’ve clearly thought this through.
They’ll often say, “I’ve realized that if I have co-owners when I die, then nothing goes to court.”
And, they’re right!
For example, if you and your spouse own a house and you add a child to the house ownership, would it avoid court when you die?
Yes, it would, because there’s an owner that when you die. They (the child) will just keep owning the house.
Same thing with accounts like bank accounts and investment accounts.
Why would we advise against this?
Because it can backfire in dramatic fashion.
One example we’ve seen more than once went something like this:
- A father added a son to his house and, for whatever reason, they had a falling out.
The son said, “you know what, I want get my share of this house,” and he filed a partition lawsuit against dad. - The court partitioned it, and the son was able to get his share of the house.
Not a good situation.
Not a very honest thing to do, but legally there was nothing wrong with it.
Co-owners can also open you up to liability.
If you add a child – who is married – to an account, let’s just say the account has $100,000 in that account – well… what if that child gets divorced?
Since you added them to the account during the marriage, could that be considered a marital asset?
And, are they now going to tie that account into this divorce lawsuit?
It’s possible. And now your co-owned account opens you up to that liability.
In a similar fashion, if that child gets in a car accident and a creditor is going after that child – the creditor could potentially go after your account because that is considered the child’s asset.
Two more common situations to keep in mind around co-ownership.
Multiple children – a recipe for disaster.
Why? Because legally, the child is going to get that property or account when you die. This means the moment you pass away, that property vests in that child. It doesn’t matter what your trust says – if you have a trust. It doesn’t matter what your will says. If your child is named directly on that account, it’s going to go to that child.
It’s worrisome because all of a sudden that kid’s going to have all that money, and they don’t need to share it.
Even if they are honest and they want to share it, that child is going to take a significant tax hit.
It’s considered their money, and if they want to share it, that’s considered a gift, and there are tax implications around gifts.
So that’s a big issue.
Here’s the last example of how co-ownership can go wrong.
Lost step up in basis
A parent adds a child to the house (sometimes the child doesn’t even know this happened) and the parent passes away.
The child (as the co-owner on the house) now has significant tax responsibilities upon the sale of that house.
Let’s say the parent bought it in the 80s for $80,000. The property value has been going up over decades, and now the parent dies.
Now the child, if they’re a co-owner, gets to pay all the gain between when the parent purchased the property to when the parent died.
This could be hundreds of thousands of dollars on which the child now has to pay taxes.
Whereas if the parent would have put it in a trust and then passed away, the child gets what is called a “step up in basis” to fair market value. They would not pay on ALL of that gain. This is a huge difference, not only in dollars, but in headache and stress.
Wills and Trusts
We’ve made it through what happens without a will or trust, now let’s talk about life with a will or trust.
A Will
The job of the will is to dispose of your assets.
It will give everything to your heirs upon death, but it would accomplish this through court (probate).
The upside of this option is that it is relatively easy, in that you didn’t have to really title any assets differently. You would just own your house in your individual name, you’d own all your assets in your individual name, and then when you died, your family would go to court.
And… that’s also the downside. Going through court and probate.
Probate’s not fun.
It’s expensive. It’s time consuming. It’s not something we want to do if we can avoid it. But, that’s the model of a will – just pass everything through a will and through the court.
A Trust
A trust is all about control.
How much control do you want to exercise over your assets?
A word of caution around control is – you need be careful.
Some parents or loved ones have set stipulations that are not realistic or that hold a child back and can cause harm in some instances.
The whole idea of a trust is to be able to pass assets to your heirs when you want them to get it through these private means. And that’s exactly what we’re doing with a trust: We are passing your assets directly to those beneficiaries without going through probate.
Will and Trust working together
In this instance, the will and the trust actually work together.
Under the model of both a will and a trust, the will serves a different role that it does if you were to have just a will – no trust.
The will’s role is to act as a failsafe. The will acts as it did in the first instance as a court document or a set of instructions to the court, to tell them where things go in the event we forgot or failed to put something in the trust.
If we do things right, everything should go to your beneficiaries and avoid court.
But let’s say a loved one had a trust and purchased a property in their individual name – maybe for the speed of the transaction or they just forgot they had a trust.
If they die with a trust but without a will, nobody owns this newly-purchased property – and it’s going to go to court.
If we have a will… that changes.
The will is going to shove the asset back into the trust, acting as that failsafe to make court easier, and dispose of things privately through the trust.
That is the first example of the difference between a will and a trust. The easiest way to illustrate the second difference between a will and trust is to show what happens when somebody dies owning property without a trust.
Inheritance with just a will
Let’s use a married couple. And this would be very similar if you’re a single person, but let’s use the example of a couple.
When you buy your property, the seller puts a deed in both your names.
Typically people are going to be what we call “joint tenants” on the property.
This just means you’re both 100% owners on the property.
That deed is taken, filed with the county, and that deed becomes hugely important, because that’s what makes you the owner of your home.
If one of you dies, it’s really not a huge deal legally, because the other spouse keeps owning the property. They keep living there without a problem.
The problem comes in if the second person passes away.
When that second person dies, all of a sudden, nobody owns the property.
Your kids or your beneficiaries – whoever would inherit from you – they’d want to come in and sell the property.
But they can’t. Because they don’t own it.
And if they tried to sell it, they wouldn’t be allowed to because they’re not on title. The county can’t give a deed to the new buyer, and they’d have to go to court.
If you think about it from the county’s perspective, it makes a lot of sense.
If you work at the county, and a kid comes in and says, “Hey, my dad died, I want to get to his house.”
How do you know this person is even his kid?
How do you really know that this person is his only kid?
How do you know that the dad even likes his kid?
It puts the person in a bad situation, and the county would say, “Hey, you’ve got to go to court. And, you’re going to have to come back with a court order saying that you can sell this house.”
This is where we can see the role of the will again.
The will is that set of instructions telling the court what you want.
If you don’t have the will, it goes off of a default code, which may or may not be what you intended.
Through that probate process, your child would be able to sell the home, but it’s going to take weeks to months to years, depending on the situation, and depending on the state.
So that’s how that would all work with no will, or just a will.
Now we’re going to look at inheriting with a trust.
The trust as a corporation
A trust is a private contract, but think of it like a corporation.
With a trust, there are owners and there are managers of the trust, just like there’s a board of directors with a company, and there are shareholders. The Board of directors runs it, shareholders own it. Same idea with your trust. You own it, you manage it.
Once the trust is in place and we’d have the manager, which is the trustee, and we’d have a backup manager.
That is typically going to be a family member. If you’ve got small kids, that could be a sibling or a parent.
If you’ve got children that are of age, the trustee could be one of those kids, depending on when you want them to receive it.
Regardless of who it is, the trust is put in place and your property is put into the trust. This is accomplished through a simple deed. It’s usually a one page document that gets filed with the county – not a big deal, really easy to do.
Now, according to the county, your trust is the owner of that property. And here’s why that matters.
Inheriting through a trust
If one spouse passes away, everything works the same as before. The other spouse keeps living at the property and continues owning it. But on the death of the second person, this is where the trust starts to shine.
The trust doesn’t die. The trust keeps owning that property, and the new manager just steps in, files an affidavit with the county, and they can sell that property.
If you think of this from the perspective of a corporation, just because a shareholder dies doesn’t mean the company dies. The company still owns its property. It still has other owners, and it still has a board of directors that’s running it. Similar idea with your trust.
The trust avoids court and maintains continuity of ownership. The fact that you die but your trust doesn’t die, keeps continuity of ownership and so there’s no need to go beg the court and ask them for permission to sell the property.
Other benefits of a trust
We’ll let you continue on with your life rather than stuck in this article.
We will have another article that goes over even more advantages to a trust like tax benefits, control, and privacy.
If you have any questions, or would like to set up a will or trust, reach out to us and we’re happy to help in any way we can.
