May 9

When Confusion Between a Trust and a Will Results In Omitted Beneficiaries


I have been working with the heirs of a couple who had trusts and wills, but really did not understood how each worked, the differences between them or that they really were different. These people were fairly sophisticated business people, but they had managed to mess up nicely prepared estate plan by not understanding what a will or a trust was and then trying to amend these documents without the assistance of an expensive and annoying attorney. Unfortunately, these cost saving measure ended up in misdirecting around $85,000 in assets.

So, what the heck are a trust and a will and what do they do? Starting with a trust: it is a place to keep assets safe and sound. You can think of it as a bowl or a safe or some other container that fits your personality. It is run by a trustee who owns the assets and manages them as instructed by the people who created it. Those people are called Trustors or settlers, depending on where you live and who your attorney is. The trustee manages the assets asdirected by a set of written instructions called a trust agreement, or trust instrument, or trust. It is generally given a fancy name by an imaginative attorney, something like the Joe Blow 1965 intervivos trust; or maybe the Mary and Joe Blow Intervivios 1995 Trust. After the rules are put into writing as the trustor or trustors want, title to assets are transferred to the trust. People often transfer title to their bank accounts, brokerage accounts, houses, sometimes cars, and other things of value, but generally not things like IRA’s. It is generally better planning to keep the IRA out and just make sure it names the after death beneficiaries and let it be that way otherwise the tax consequences can be surprising. A trust operates while the settlers, and beneficiaries are alive and is usually designed to continue operating after the person who creates it dies. If the settler is also the trustee, the trust will be set up with a successor trustee or trustees who take over when the Settlor/trustee dies or is incapable of managing the trust anymore or just gets tired of it and does not want the headache anymore.

Wills are testamentary instruments. This is legal speak for they don’t do anything until you die. When you die they come to life and take control of all your stuff and make sure it gets distributed the way you want, as long as they were written properly and signed properly with the right number of witnesses. The problem with a will is that, depending on the value of the estate left behind, they have to go through a legal process called probate. Probate is a legal procedure, supervised by the court, in which all of the decedents assets, income, and debts are accounted for and paid off then the left over’s are distributed to the people or charities identified in the will as beneficiaries. This process is two relatively unpopular things: 1) public and 2) expensive.

So, to get around the public and expensive attributes of wills, Attorneys have come up with a way to keep things from being too public or expensive. It is called an estate plan. It, generally speaking, uses a trust and a will working together to keep the overall cost to a minimum and maintain as much privacy as possible. This works because a trust does not have to go through probate. The trick is to transfer as many of the big ticket assets as possible into the trust while the people who create it are alive and then when they die, use a will to catch the inexpensive items and pour them into the trust for administration and distribution. This avoids probate because if the value of the assets the wills catch is small enough to avoid the full blown probate proceeding. The last few inexpensive assets can be transferred in by a relatively informal and not too public procedure.

Problems arise with laymen when they do not realize that the trust and the will are separate documents, that they work differently and perform different functions, and that assets placed into the trust cannot be willed to someone without first taking them out of the trust and then making a specific bequest in the will. The other question is, why anyone would want to will such an asset to another person when all they have to do is amend the trust to accomplish their intention. That is why before trying to change these documents it is a good idea to talk to an attorney to see if how you want to change things can be accomplished by doing what you think is the thing to do. It is not much fun for any attorney, or the beneficiary for that matter, to have to sit down across from each other and discuss why they are not going to get the $85,000 mom wanted them to have because mom took the cheap way out but failed to accomplish what she wanted to do.

Closing disclaimers! This blog simply contains my thoughts and ruminations on certain subjects. They are thoughts in general and are not intended to be given or taken as legal advice. I do not give legal advice until I have had a chance to get a good handle on the facts of a case and have been hired. So if anything in this entry piques your interest or seems to apply to your situation follow it up by consulting an attorney. I am sharing thoughts here, not giving legal advice.

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