[See our Disclaimers page about relying on this website’s contents.]
People ask us to explain the difference between wills and trusts from time to time when we are speaking to groups about advance health care directives and other estate planning topics. We have tried many ways to answer the question over the years, but we still have not found the perfect explanation. This article provides our most recent description of wills, trusts, and their relationships to each other.
Most people understand that a last will and testament is a document that expresses a person’s plan to finish bill payment and other business that the person’s death may interrupt and direct distribution of the person’s assets when the unfinished business concludes. The concept of a trust seems to be harder for people to grasp than a will. Perhaps the easiest starting point to distinguish wills and trusts is to say that they are not the same things, but wills and trusts connect sometimes in more than one way. Some wills establish trusts, some wills direct asset distributions into trusts (called “pour-over” wills), and other wills have no connections to trusts at all.
We illustrate the creation of a simple trust with a client sometimes by handing an ink pen to the client and explaining that we want the client to hold the ink pen and take care of it until a young family member reaches a certain age, and then distribute the pen to the family member on that person’s specified birthday. We explain that the “entrustment” of the ink pen creates a trust relationship between us, the creators of the trust, and the client, who serves as the trustee for the benefit of the young family member, the trust beneficiary.
A person can make a trust during the person’s lifetime (lawyers call that kind of trust an “inter vivos” trust) or the person can make a last will and testament that includes language that establishes a trust to take effect after the person’s death (lawyers call that kind of trust a “testamentary” trust). If a person makes an inter vivos trust and retains the power to change or cancel the trust, some lawyers call that trust a “living” trust or a “revocable” trust (we prefer to call them revocable trusts to avoid confusing people with “living wills,” which have nothing to do with trusts or last wills and testaments). If, however, the person does not reserve the power to change or cancel the trust, it may be what lawyers call an “irrevocable” trust.
Testamentary trusts may be the oldest kinds of trusts because wills have existed for thousands of years. Federal and Indiana laws that took effect over the past three decades have made testamentary trusts more popular among estate planning lawyers that help married couples plan for nursing home care because federal Medicaid law treats testamentary trusts benefiting surviving spouses more favorably than revocable trusts.
We use revocable trusts in some estate plans to simplify complex asset portfolios or provide centralized control and security for clients that unstable family situations. A revocable trust can simplify complex asset holdings, such as numerous bank or investment accounts in multiple financial institutions, or real estate located in multiple states, because the assets can be titled to the trust to allow the trustee and all successor trustees to manage the assets without having to change ownership after the client’s death.
Irrevocable trusts allow clients to make gifts to people or charities with protective restrictions that prevent people from squandering or ruining the gifts. Wealthy people use irrevocable trusts for gifts such as life insurance policies to keep the life insurance policies securely in trust so that wealth can pass to beneficiaries through the life insurance policies free of federal estate taxes. Some people use irrevocable trusts to protect assets from nursing home costs and other expenses. Such long-term care planning has become much more common in recent years as nursing home costs have become more pressing threats to middle-class wealth than estate taxes, but Medicaid transfer penalty laws require estate planning lawyers to design such asset protection plans carefully to avoid disqualifying estate planning clients from Medicaid benefits that clients need to pay nursing home bills.
We continue to write articles like this about wills and trusts because we find persistent myths and misunderstandings about these topics in our surrounding communities. More information appears in our previous articles including: https://hawkinselderlaw.com/whats-in-a-will/, https://hawkinselderlaw.com/trustworthy-trusts/, https://hawkinselderlaw.com/estate-plan-checkups-you-probably-need-one/, and https://hawkinselderlaw.com/will-vs-trust-which-do-you-need/.
Jeff R. Hawkins and Jennifer J. Hawkins are Trust & Estate Specialty Board Certified Indiana Trust & Estate Lawyers and active members of the Indiana State Bar Association and National Academy of Elder Law Attorneys. Both lawyers are admitted to practice law in Indiana, and Jeff Hawkins is admitted to practice law in Illinois. Jeff is also a registered civil mediator, a Fellow of the American College of Trust and Estate Counsel and the Indiana Bar Foundation; a member of the Illinois State Bar Association and the Indiana Association of Mediators; and he was the 2014-15 President of the Indiana State Bar Association.
Find more information about these and other topics at www.HawkinsLaw.com, add us to your Google+ circles, like us on Facebook, follow us on Twitter @HawkinsLawPC or call us at 812-268-8777. © Copyright 2016 Hawkins Law PC. All rights reserved.