Wills vs. Trusts: Building the Foundation of Your Estate Plan

When planning for the future, it’s essential to understand two of the most important documents in estate planning: wills and trusts. These legal tools both help ensure your assets go to the people you care about, but they work in different ways and offer unique benefits. In Michigan, understanding these differences can make it easier to choose the best approach for you and your family.

Key Differences: When Do Wills and Trusts Take Effect?

A significant difference between wills and trusts is when they take effect.

Wills: Only Upon Death - A will only takes effect after you pass away. This means that if you only have a will, it won’t help your family if you become unable to manage your affairs while you’re still alive. If someone becomes incapacitated (for instance, due to an accident or illness), the will doesn’t provide a plan for who will handle their finances or make medical decisions on their behalf. The family may then need to go to court to appoint a guardian or conservator, a stressful process that can delay crucial decisions.

Example: Imagine John, a Michigan resident, only has a will. He is in an accident and can no longer make decisions for himself. Because John’s will doesn’t cover incapacity, his family must petition the court to choose someone to manage his affairs. This process can be time-consuming and may even result in someone John wouldn’t have chosen handling his money and personal decisions.

Trusts: Immediate Effect and Incapacity Protection - Unlike a will, a trust takes effect as soon as it’s created and “funded” (meaning assets are transferred into it). This allows you to set guidelines for how your assets are managed, not just after your death but during your life as well. With a trust, you can designate someone to handle your assets if you become incapacitated, saving your family the need for court intervention.

Example: Consider Sarah, who has set up a trust. If she suffers a stroke, her trust already names her sister as her successor trustee, meaning her sister can take over without needing court approval. This gives Sarah peace of mind knowing her wishes will be followed without any additional steps for her family.

What Assets Do Wills and Trusts Cover?

Understanding which assets each document covers can help ensure nothing is overlooked.

Wills: Assets in Your Name Only - A will governs assets solely in your name, such as personal property or real estate that you own without any co-owners. However, a will does not control assets that pass directly to beneficiaries (like life insurance policies or retirement accounts), nor does it cover assets jointly owned with others.

Example: Let’s say Tom owns a home by himself in Michigan and has a life insurance policy naming his daughter as the beneficiary. His will can specify who gets the house after he dies, but it doesn’t control the life insurance policy; that goes directly to his daughter because of the beneficiary designation.

Trusts: Assets Transferred to the Trust - A trust covers only the assets that you’ve placed in it or where the trust is listed as the beneficiary. This is called “funding the trust,” and it’s a critical step that many people overlook. Properly funding the trust ensures your assets are handled according to the terms you’ve set in the trust.

Example: Rachel transfers her home and bank accounts into her trust. She also names her trust as the beneficiary of her life insurance policy. By doing this, Rachel ensures that these assets will be managed according to her instructions in the trust, both during her life and after her death, without involving the court.

Administration: How Are Wills and Trusts Handled After Death?

The way a will or trust is handled after death also differs significantly.

Wills: Subject to Probate Court - In Michigan, a will must go through the probate process, where the court oversees the transfer of assets to ensure everything is done according to the law. Probate can be a lengthy and public process that may take months, even years, and may require the family to hire an attorney. In some cases, family members may contest the will, which can delay things further and increase costs.

Example: After Jim’s passing, his family must file his will in Michigan probate court. Since the process is public, anyone can view his will, including what his family members inherit. This may make his beneficiaries targets for scams or unwanted attention.

Trusts: Avoiding Probate Court - Assets in a trust bypass probate, meaning they’re transferred privately and more quickly. This can save time, money, and keep the details of your estate private. By using a trust, you allow your loved ones to avoid the hassle of probate and keep family affairs out of public records.

Example: Maria, who created a trust, passes away. Her successor trustee can immediately start distributing her assets according to her wishes, without having to go through probate. This privacy allows Maria’s family to handle her estate efficiently and keeps her affairs out of the public eye.

Cost Comparison: Wills vs. Trusts in Michigan

Both wills and trusts come with their own costs.

Wills: Lower Upfront Cost but Higher Long-Term Fees - Creating a will in Michigan may cost anywhere from $1,500 to $3,000, depending on complexity. While this is often more affordable upfront, keep in mind that wills must go through probate, which can incur additional legal fees, court costs, and delay distribution of assets.

Trusts: Higher Upfront Cost but Saves on Probate - A trust generally costs more to set up, ranging from $3,000 to $5,000 in Michigan. However, since trusts avoid probate, they often save money in the long term by preventing the need for probate fees and court expenses. Many find that a trust offers better value by eliminating future probate costs.

Combining Wills and Trusts for Comprehensive Planning

Many Michigan residents find it beneficial to combine a will and a trust. A “pour-over” will, for instance, directs any assets not transferred to the trust during your lifetime to be added to the trust after your death, covering all bases.

Example: Jake sets up a trust but accidentally forgets to transfer his classic car into it. With a pour-over will, the car will be added to the trust after his death, ensuring it’s managed according to his original wishes.

Finding the Right Plan for Your Family’s Needs

Ultimately, choosing between a will and a trust—or combining the two—depends on your family’s unique situation. To decide on the best solution for your needs, consider meeting with an estate planning attorney in Michigan who can guide you through your options.

Meeting with an attorney can give you peace of mind knowing you’ve made the right choice. An attorney can help you analyze your assets, consider your family’s needs, and develop an estate plan tailored to you. The right estate plan will ensure your loved ones are taken care of and protect them from unnecessary stress and expenses.