Understanding the Difference Between:
Wills and Trusts
WHAT IS A WILL?
A Will is a document that sets forth your wishes about how your assets are to be distributed after your death. It is called your Last Will and Testament. Assets are to be distributed after your death in a Michigan probate court proceeding.
It must conform to all requirements of the law. It must be executed with all the formality required by law. The requirements of law in each state are different.
It is important that you have a competent lawyer prepare your Last Will and Testament. It is one document that cannot be changed once it becomes effective, i.e. after your death. It is extremely important that it is done correctly.
Wills are not preferred ways to pass on property to loved ones because the process of probating a will is time-consuming and expensive. Trusts and Direct Distribution Plans are better alternatives.
WHAT IS A TRUST?
A trust is a legal entity in which a person called a “Trustee” holds title to property for the benefit of someone called a “beneficiary.”
The person who creates a trust is usually called the “Settlor” or “Grantor” in the trust document. So if you would like a trust created for you, you will be known in the document as the Settlor or Grantor.
The “Trustee” is the person that holds legal title to the property in the trust. In some trusts, like a revocable trust or living trust, the Settlor is also the “Trustee.” This means that the person for whom the trust is created maintains control of his or her assets as Trustee.
Every trust must be for the benefit of someone. The person or persons who benefit from the trust are called the “beneficiary” or “beneficiaries.” So you might be the beneficiary of your own trust. Your children, grandchildren, spouse, friend or church may be beneficiaries during your life or after your death.
The body of the trust document describes what is to be done with the property in the trust.
The “trust property” or “trust assets” must be titled in the name of the trust in order for the trust to govern its disposition. A trust must be “funded” to be effective.
“Funding the trust” means changing the legal title to the property to the name of the trust. This is a crucial step that is unfortunately often overlooked. The Trust document can only govern property that is titled in its name.
You do not need to be a millionaire to have a trust. Any person with someone to protect, like minor children, elderly relatives or disabled beneficiaries, can make very good use of a trust.
As a legal entity, a trust must follow the laws of the jurisdiction in which it is created. Each state has different laws that govern trusts. Some trusts can act as a will substitute on the death of its creator.
There are many types of trusts, e.g. Living Trusts, Special Needs Trusts, Grantor Retained Annuity Trusts (GRAT), Charitable Lead Annuity Trusts (CLAT), Charitable Remainder Trusts (CRT), Irrevocable Life Insurance Trusts (ILIT), Marital Deduction Trusts, QTIP Trusts, etc. Each is different. Each serves a purpose.
Trusts are complex documents, with specific uses and tax implications. They should be prepared by competent attorneys. They can be very helpful in many ways. But they must be done right to be effective.
For more information on wills and trusts, please feel free to email firstname.lastname@example.org or call us at (906) 228-6212. We regularly see clients in Sault Ste. Marie, Iron Mountain, Marquette, Houghton, Menominee and Escanaba.