If you’re thinking about making, or updating your estate plan, you may be wondering whether you need a will, a trust, or both. Many people are unclear about the difference between a will and a trust, so if you are, too, you’re in good company. Understanding how a will works, and how a trust operates, will make it easier to decide which is better for your needs.
You’re probably somewhat familiar with the concept of a last will and testament, commonly called a will. A will is a document that dictates who should receive the assets of the person making it (the testator) after the testator’s death. A will also typically names a person (the executor, also called the personal representative in New Mexico). The personal representative administers the testator’s estate, ensuring that the intended beneficiaries receive their bequests. Estate administration is also often referred to as the probate process. The testator may also use the will to identify a preferred guardian for his or her minor children.
New Mexico, like other states, has rules about how a will must be written and executed. However, in order for even a properly prepared will to be effective, it must be submitted to a court with jurisdiction after the testator’s death to open a probate estate. The personal representative does not have the authority to manage the estate and transact estate business until formally appointed by the court. If the testator left behind minor children with no other parent, the court must also formally appoint the named guardian (or another person if the named guardian is not available or suitable to serve).
By the same token, beneficiaries named in the will cannot simply take what was left to them. Once appointed, the personal representative must locate, gather, and inventory all estate assets. He or she must pay any legitimate debts and taxes owed by the estate, and then distribute the remaining assets according to the will. In short, if you decide to create an estate plan based on a will, your estate will need to go through probate. The process of distributing it will be overseen by the court and will likely take several months.
The primary advantage of a will-based estate plan is its simplicity. A will is relatively easy to create, and it is generally less expensive than a trust. A will also lets you name a guardian for your minor children. While some testators prefer to keep their estate out of probate, for others, the probate process is a plus; it can offer peace of mind to know that the court will ensure their wishes are carried out and oversee the process, especially the estate administration is complicated.
However, there are drawbacks to a will-based plan. As described above, a will must go through probate, which can be a cumbersome and time-consuming process. Many people prefer to avoid probate. But perhaps an even bigger drawback is that a will only addresses what will happen to your assets if you die. Who will manage your assets if you suffer a brain injury, develop Alzheimer’s disease, or otherwise become legally incapacitated during your lifetime?
If you have a will-based estate plan, you had better also have a durable financial power of attorney. That will enable a person you have chosen (your agent) to “step into your shoes” and transact financial business on your behalf. You should also have a medical power of attorney so that you can appoint an agent to make healthcare decisions for you, as well.
There are many types of trusts, but when we speak of a trust-based estate plan, we are generally talking about a revocable living trust. A trust is essentially a legal relationship between three parties: the grantor, who creates the trust and puts assets in it; the trustee, who manages the trust; and the beneficiary, who receives income or distributions from the trust.
If you create a living trust, during your lifetime, you occupy all three roles. You can use, manage, and enjoy assets you have placed in the trust’s name just as if they were still in your own. In fact, if you choose, you can revoke the trust altogether; that’s what “revocable” means. When you create the trust, you also name a successor trustee and successor beneficiaries.
The successor trustee takes over management of the trust after you die or become incapacitated. No court involvement is required. If you are still alive, the successor trustee manages trust assets for your benefit. After your death, the successor trustee manages the trust for your named beneficiaries according to the trust document, or simply distributes trust assets to them—whatever you arranged when you created the trust.
Because there is no need for court oversight with a trust, people who want to prevent their estate from going through probate may prefer a trust-based plan. Another major advantage of a trust is that the successor trustee can seamlessly take over. If the trust provides for assets to immediately be distributed to the successor beneficiaries, they may have their inheritance in a matter of weeks, not months or longer. Also, with a trust, your successor trustee is instantly poised to take over management of your assets if you become incapacitated, meaning your assets remain in the control of someone you trust.
There are some drawbacks to a trust. It is usually more expensive to create a trust than a will. A trust is also more work up front than a will, since you have to re-title assets in the name of the trust (“funding the trust”). You may also still need a will in addition to a trust, either to name a guardian for your children or to “pour over” assets that are still in your name at your death into the trust.
Either a will-based estate plan or a trust-based estate plan is vastly better than having no estate plan at all. If you want to learn more about which is best for you, please contact our law office to schedule a consultation to discuss your needs.
© 2021 The Law Offices of Dana M. Kyle, P.A.