A trust and a will are effective estate planning vehicles that can serve similar purposes but differ significantly. Generally speaking, the sole purpose of a will is to outline who will inherit your property after your death and who will administer your estate. Unlike a trust, a will comes into effect only after you die.
When someone who utilized a will passes away, the estate is said to go through “probate,” a judicial process in which a Court appoints a personal representative to administer your estate pursuant to the terms of your will.
This process is usually informal and unsupervised by the court. A revocable living trust is the most common trust used as a “will substitute.” Practically speaking, when using a trust to dispose of your estate, you would also have a will in place that “pours” any assets in your own name into the trust upon your death.
One of the differences between a will and trust is that, unlike a will, a trust is effective immediately upon creation. You would select a trusted individual to serve as trustee, who is responsible for administering the trust and disposing of assets as dictated by the trust agreement. Typically, the creator (the “grantor”) would serve as the initial trustee until their death or incapacity, at which point a successor trustee steps in to manage the trust.
In this way, the trust serves a similar function to a will in that it ultimately transfers your assets to your successors at death. However, a trust can serve several additional functions other than simply distributing assets, which a will cannot. First and foremost, a properly funded living trust is a very effective tool for managing your assets if and when you cannot, such as if you become mentally incapacitated.
While you have capacity, you could continue acting as trustee yourself, largely managing your own assets in the same fashion as you do now. However, upon your incapacity, your nominated successor trustee can quickly step in to manage your finances and property, including the payment of your expenses.
Second, many people have historically used a living trust to avoid probate. However, due to the streamlined and speedy nature of probate in Colorado, we do not typically recommend using a trust solely to avoid probate. While probate may still be a burdensome and costly enterprise in other states, Colorado has taken great strides to simplify and promote the speedy and efficient administration of estates.
Likewise, the potential for abuses of discretion and delay on the part of fiduciaries (such as trustees and personal representatives) exists whether or not an estate must pass through probate. Nevertheless, if avoiding probate is a genuine goal, the vast majority of your assets either (i) must be transferred to the living trust during your life or (ii) have beneficiary designations in place such that they are transferred directly to the intended recipients immediately upon your death.
Otherwise, your probate estate would likely need to be opened for your will to pour your assets into the trust, defeating the purpose. Third, a trust is an excellent vehicle to pass your assets to minor children. Children can still inherit property even if they are minors; however, they would not have the legal capacity to control or manage those assets until they reach the age of majority (21 in Colorado).
Establishing a trust for minors’ benefit allows the trust to receive the property until your children have reached a designated age. Until they reach the required age, the trustee would manage their inheritance, including prudent investment and taxes, and make disbursements to them or on their behalf. Notably, the trust can be set up in various ways to meet the grantor’s wishes regarding how the assets are spent and distributed.
For instance, a purely discretionary trust, in which the trustee has complete control over the timing and frequency of distributions, may be desired by some (and may be recommended to preserve public benefits for the disabled).
On the other hand, others may want to dictate the exact timing and frequency of distributions. Fourth, trust provides significantly more privacy than a will. Once submitted to a court for probate, a will becomes a matter of public record and is available for inspection.
On the contrary, a trust must not be recorded or submitted to a court. Additionally, in Colorado, the beneficiaries of a trust are only entitled to a copy of the portions of a trust which are pertinent to their interest in it, making it possible to keep the beneficiaries of the inheritance will receive private, even from one another. Furthermore, the title to assets, including homes, is transferred to the trust itself in funding a trust.
This makes it possible to protect your privacy by removing your name from the title to real estate while maintaining your ownership interest in the asset. The foregoing are just some of the benefits of a trust. Many other potential uses for a trust are tailored to more specific goals, such as Medicaid and public assistance planning or complex tax planning.