Last Will and Testament vs. a Trust: What’s the Difference?
Last Will and Testament
The person signing the Last Will and Testament is called a Testator. A Last Will and Testament takes effect upon the Testator’s death and normally requires a court process called probate. The Last Will and Testament gives the court directions on what the Testator wants to happen during this probate process.
If a beneficiary doesn’t agree with what the Testator says in the Last Will and Testament, the case becomes contested and could result in a very long family battle. As with all court processes, the final decision will be up to the judge and the Testator’s wishes could possibly not be honored. And since probate involves a court, the case, including the Last Will and Testament document, are available for the public to see.
The document will tell the court who the Testator wants named as Executor or Personal Representative. This person will find and notify beneficiaries, notify and deal with creditors, deal with banks and financial institutions, attend court hearings, be involved with distributions and accountings, sell property as needed, and work with the estate attorney to wrap up the Testator’s affairs.
The Last Will and Testament will tell the court who the Testator wants to receive certain property, name Guardians for minor children, and state how the Testator would like their remains disposed of. The Last Will and Testament could also create a testamentary trust, Testamentary trusts are often created for minor children who are not capable of managing their inheritance.
The person who signs a trust is called the Grantor or Settlor. Unlike the Last Will and Testament, an inter vivos trust is effective during the Grantor’s lifetime. The trust will name a Trustee, who is in charge of carrying out the terms of the trust. Depending upon the purpose of the trust, the initial Trustee may be the same person who created the trust or may be another person or entity. A trust, in plainest terms, is a contract between the Grantor and the Trustee.
To “fund” the trust the Grantor transfers property of their choosing to the trust. Because the property is “owned” by the trust at the time of the Grantor’s death, that property is not subject to probate. The “trust property” is dealt with by the Trustee in accordance with the terms of the trust. As with the Last Will and Testament, the trust will also give instructions on how the Grantor wants property distributed at their death.
Trusts can be created for various reasons. As noted above, one of these will be to avoid probate and provide the Grantor and their family with privacy. Another common reason is to protect assets from the costs of long-term nursing home care.
There is a common misconception that Medicare covers long-term nursing care. Medicare will pay for 20 days of nursing care following a hospital stay of at least three days. From day 21 – 100 Medicare will only pay a portion of the daily cost, the balance is the patient’s responsibility. Fortunately, the patient’s co-pay is often covered by a Medicare Supplement Policy. Medicare’s nursing care benefits however expire completely after 100 days, and they are not subject to renewal for subsequent hospitalizations.
On day 101 an individual must have other resources to pay for their long-term nursing care. This would include long-Term Care Insurance, private pay (out of pocket), and Medicaid.
Long-Term Care Insurance only accounts for 9% of cases due to premium costs and qualification standards. (You need to be healthy when you take out the insurance).
Often times people are forced to pay out of pocket until their life savings are depleted. At an average monthly cost of $7,756.00, it doesn’t take long for a family to lose everything to the nursing home.
Medicaid, a federally funded program, is the largest payer of long-term nursing home care. Medicaid has strict qualification guidelines, however, a proper asset protection trust can insulate family assets from the reach of a nursing home or other care providers while at the same time allowing the individual to qualify for coverage that will pay for their long-term care.
If you would like to discuss any of these matters, please do not hesitate to reach out to our office for an appointment.