Almost everyone has heard of a will. And most people have some idea about trusts. But few people understand them beyond a superficial level. That’s true of even most lawyers.
The common understanding is that wills and trusts are both ways to leave behind instructions for someone that you designate to organize and distribute your property to your loved ones, and that wills tend to be easier and cheaper while trusts are more complex and expensive. But the common understanding misses quite a bit.
A last will and testament is a formal document that goes into effect when you die. It names your heirs, explains how you want your estate to be distributed, and appoints an executor to initiate probate proceedings and carry out the will’s instructions.
A trust is different. A trust is a separate entity that holds your property and administers that property in accordance with the trust agreement. The trust goes into effect while you are alive and has three parties: The grantor (the person who creates the trust), the trustee (the person who manages the trust), and the beneficiaries (the people who will receive the trust’s property). For the most common types of trust (revocable living trusts), the person who creates the trust also manages the trust until they die, at which point a successor trustee named in the trust agreement will take over.
What are the advantages of a will? First, it lets you provide specific instructions about how you want your property to be distributed. Otherwise, your stuff will be distributed according to the CNMI’s default rules (known as the law of intestacy). Second, if you have minor kids, a will gives you the chance to recommend who you’d like to take care of your kids for you. And, third, a will is straightforward to set up.
What are the disadvantages? First, the flip side of wills being straightforward is that they’re also limited. They lack almost all of the bells and whistles that trusts can provide. Second, and usually most important, wills must go through the probate process, which is slow and expensive (and, indeed, will usually cost much more than drafting the will). Third, if you have property in more than one jurisdiction, you’ll need to go through probate in each of those places, greatly amplifying the delay and expense. And, fourth, because probate is a court-supervised process, it’s also public. So, anyone can see your will and how your property was ultimately distributed.
What are the advantages of a trust?
First is privacy. Because property held in a trust bypasses the probate process, the public won’t have the right to read your trust agreement and they won’t know who received your property.
Second is speed. Avoiding probate also eliminates the delays involved in probate. So, your heirs will receive your property far faster, sometimes years faster.
Third is lower overall cost. This conclusion may come as a surprise since the upfront cost of setting up a trust will generally be more expensive than creating a will. But a trust avoids the back-end expense of going through probate. In other words, the total cost of creating and managing a revocable living trust is frequently cheaper than the overall cost of making a will and then going through probate.
Fourth is flexibility. A trust can serve many purposes that a will cannot. Want to minimize your taxes? A trust can, a will can’t. Worried that your kids won’t handle a sudden burst of wealth well? Your trust can give them payments over years or decades (whatever you think best). A will can’t. Worried that your kid might eventually get divorced, and you want to keep your property in the immediate family? A trust can protect your assets, a will can’t. And on and on.
What are the disadvantages of trusts?
First, they require more work upfront because you will essentially replicate the probate process when you set up the trust. But, on the bright side, it’s much easier for you rather than your heirs to do that work because you know what you own and where it is. That’s not true for most heirs and executors pulled into the probate process unexpectedly who then have to play detective and hope they found all the debts and assets.
Second, trusts tend to be more expensive initially. Part of that is because of all the extra work early on compared to a will. And partially it’s because the flexibility of trusts also makes them more complex.
Third, even if you create a trust, you’ll still need a will. But it won’t be the same kind of will. If you have a will-centered estate plan, the will is a long, detailed document that will need to go through probate. But if you have a trust-centered estate plan, the will is a short, simple document that will only be necessary if you forgot to transfer key assets into the trust. In that case, the will says that those assets belong to the trust and will be distributed according to the trust agreement.
This column is for informational purposes only and is not intended to be taken as legal advice. For your specific case, consult a lawyer.