Dear Mr. Market:

The stock market has been rather nasty as of late so let us switch gears and touch on a topic that most investors avoid yet need to pay more attention to. After all, what exactly happens to your investments when you’re gone? Do you actually need a living trust or would a will suffice? We reached out to Mindy Baldwin, an estate planner in Rancho Santa Margarita for expertise on this topic:

The terms “will” and “trust” come up often when doing estate planning. Many people assume that these terms mean the same thing and use them interchangeably. However, wills and trusts are different documents that are used in different circumstances.  

A will allows you to state how your assets will be distributed and appoint an individual/entity (called an “executor”) to administer your assets. A will is only effective after your death and only covers assets titled in your name at the time of death.

A trust allows the creator (called the “grantor” or “trustor”) to appoint a person (called a “trustee”) to hold property for the benefit of another (called a “beneficiary”). In many instances, the trustor also acts as trustee during the trustor’s lifetime and appoints a successor trustee to take over after he/she dies. The trustee administers the trust and directs distribution of the trust assets.

Unlike a will, a trust is effective at the time of creation. Thus, trust assets can be distributed both during the life and after the death of the trustor. However, only assets that have been transferred to the trust will be distributed by the trust’s terms. You can transfer assets to your trust by either re-titling them in the name of your trust or designating the trust as a beneficiary. This process is called “funding” the trust.

Perhaps one of biggest differences between a will and a trust is that a will does not avoid probate whereas, in most instances, a properly drafted and funded trust does avoid probate. Probate is a legal process for transferring property after someone dies. Probate is not confidential and can be very expensive. In California, there are statutory legal and executor fees imposed as part of the process. These fees are based on the value of the estate at the time of death and can be increased at the judge’s discretion if, for example, the estate being probated is particularly complex. Because probate involves the court system, it can also be a very lengthy process. In California, it can take a year to probate an estate. For these reasons, many people create estate plans designed to avoid probate.

Wills and trusts differ in other respects as well. For example, since a trust is effective during your lifetime, it allows you to plan for your potential disability. It also allows you to plan for tax savings, particularly if you have assets worth more than the federal (and, if applicable, state) tax exemption. On the other hand, wills allow you to designate guardians for your minor children.

If you live in California, don’t own any real property and the total value of your assets is $35,000, you might consider a will instead of a trust. Conversely, if you own several properties and the total value of your assets is $8.5 million, a trust might be a better option. Your estate planning attorney can help you determine whether and how best to include a will and/or a trust as part of your estate plan.

Disclaimer: This article (1) is not provided in the course of and does not create or constitute an attorney-client relationship, (2) is not intended as a solicitation, (3) is for informational purposes only and is not intended to convey or constitute legal advice, and (4) is not a substitute for obtaining legal advice from a qualified attorney.  You should not act upon any such information without first seeking advice from a qualified attorney regarding your specific matter.

Would you like to contact Mindy for more details or specific questions? Mindy Baldwin is a very accomplished attorney specializing in estate planning. Her practice  is based in South Orange County but she serves clients throughout California.

She can be reached via phone at (949) 370-6281 or email at mindy@baldwinestateplanning.com