Wouldn’t it be nice to combine the best features of joint tenancy with a Will? That’s where Trusts come into play. Trusts are now one of the most widely used devices to transfer assets from parent to child. Over the course of this series you are going to learn how Trusts are used, and abused, by people throughout California. There are many benefits of using a Trust, but there are many pitfalls too.
TRUST vs. WILLS
Aren’t wills and Trusts the same thing? No, they are quite different, although they share some common characteristics. For example, both a Trust and a Will can guide the transfer of your assets from you to your children after your death. But the way in which they accomplish that goal varies dramatically.
A Will requires a court-supervised process called Probate. And Wills only work after you die. While you are alive, the Will provides you with no help in managing your finances if you lose capacity, for example. On the positive side, however, Wills are a default device—meaning that the Will can control any asset left in your individual name. You can think of a Probate as being someone stepping into your shoes after you’re gone. If you owned an asset and it was not titled in joint tenancy or under a Trust, for instance, then the executor appointed to administer your Will can control that asset. And the Will terms will determine who ultimately receives that asset.
Trusts are entirely different. For starters, a Trust only controls assets where the title to the asset is changed to the Trust. If the Trust does not hold title to an asset, then the Trust cannot control it. Unlike a Will, a Trust is NOT a default device. For example, if you own a home and you have your name on the deed, then you would need to file a new deed that transfers the home to you as Trustee of your Trust. Once you do that, the Trust controls that asset.
Furthermore, Trusts are living documents, meaning they are both created and effective while you are still alive. If you lose capacity, or simply don’t want to manage your Trust assets anymore, a successor Trustee can step in and manage the Trust estate. Upon your death, the same things occurs—a successor Trustee takes over Trust management. Wills, however, only work at your death. A Will does nothing to protect or help you in you lose capacity while you are still living.
Better yet, Trust’s don’t need a court-supervised Probate process to be administered or to transfer assets to children at death. They are private documents that can be used to transfer assets outside of court.
A Will and a Trust do not overlap. If an asset is titled in the name of a Trust, then the Trust controls it. If an asset is titled in an individual’s name alone, then the Will controls it. There is no in-between.
At times, when people create a Trust they will also sign a “pour-over” Will. All that means is that any assets subject to the Will can be transferred to the Trust and then the Trust terms will control the asset’s ultimate distribution.
For example, let’s say you created a Trust and transferred your house into the Trust’s name. But then you sold that home and bought a new one. However, you forgot to title your new home in the name of the Trust, instead taking the deed in your own individual name. Upon your death, the new home cannot be controlled by the Trust because the Trust is not on title. Therefore, the home will default to your Will. Of course, the Will must go through a court-supervised Probate process, that is always true. So your named executor would open probate, go through the court process, and then ultimately your home will end up in the Trust if you have a pour-over Will. It may sound like a lot of steps, and indeed it is, but at least it gets everything to the Trust eventually.
Obviously, it is much better and easier not to use a pour-over Will. And that’s why you must be careful to ensure all your assets are titled in the Trust name. Fail to do that and you will create quite a headache for your children.