Wills and living trusts both allow you to name beneficiaries for your assets. The similarity however ends there. For example, the biggest draw to use living trusts is to avoid probate. Probate is the court system designed to wrap up a person’s affairs after their debts. Probate takes a long time, can be very expensive, and for most estates, isn’t necessary. But living trusts on the other hand are more complicated to make, and you can’t use a living trust to name an executor or guardians for your children. You need a will to do those things.
The right strategy depends on individual circumstances. For some, a living trust can be a useful and practical tool. For others, it may be a waste of time and money.
What is a Will?
A will is a written document—signed and witnessed—that indicates how your property will be distributed at the time of your death. It is revocable and subject to amendment at any time during your lifetime. It also allows you to appoint a guardian for your minor children.
What is a Living Trust?
A living trust provides lifetime and after-death property management. If you are serving as your own trustee, the trust instrument will provide for a successor upon your death or incapacity. Court intervention is not required. Livings trusts also are used to manage property. If a person is disabled by accident or illness, the successor trustee can manage the trust property. As a result, the expense, publicity, and inconvenience of court-supervised distribution of your estate can be avoided.
Advantages of a Living Trust
- Avoid probate on your assets
- Plan for the possibility of your own incapacity
- Control what happens to your property after you are gone
- Use it for any size estate; and
- Prevent your financial affairs from becoming a matter of public record
While a trust sounds appealing, there are drawbacks. A living trust is more expensive to set up than a typical will because it must be actively managed after it is created. Most importantly, however, a living trust is useless unless it is funded. A living trust can only control those assets that have been placed into it. If your assets have not been transferred or if you die without funding the trust, the trust will be of no benefit as your estate will still be subject to probate and there may be significant state estate tax issues.
Types of Trusts
There are basically two types of trusts: revocable and irrevocable. Trusts can be designed to do just about anything you want them to do—special needs trusts and spendthrift trusts are just two examples—but they all fall into one of these two categories.
An irrevocable trust isn’t an option for most people because it involves turning over ownership of your property to the trust and its trustee forever—there’s no turning back.
A revocable living trust can be “undone” if you change your mind. You’re always free to reverse your decision later if you form a revocable living trust rather than write a will, but you might not want to. This type of trust has some distinct advantages over a last will and testament.
Avoiding Probate
Probate is the court-supervised process of transferring assets from a decedent’s ownership into the names of his beneficiaries. It’s required when someone dies leaving a will—or even if they don’t leave a will—because the property has no other way of passing to a living individual.
A revocable living trust doesn’t require probate because the trust owns the assets and the trust hasn’t died. It’s a private contract between you as the “trustmaker” or “grantor” and the trust entity. In most cases, the grantor serves as the trustee of his own revocable living trust, managing the property placed within it during his lifetime.
A successor trustee can be named to step in and take over management of the trust when the grantor dies, settling it and distributing its property to the beneficiaries named in the trust documents.
Maintaining Your Privacy
A will becomes a matter of public record when it’s submitted to the court to open probate. Anyone can stop by the courthouse and read it. They’ll know what you owned and to whom you left it.
No one other than the beneficiaries—and, in some states, your heirs regardless of whether they’re beneficiaries of the trust—are entitled to see your trust documents. They won’t become public record unless an heir or beneficiary files a lawsuit to challenge the validity of your trust.
You Might Need a Will, Too
A trust is an empty vessel when it’s first formed, a legal entity without ownership of anything until you transfer your property into it. Property that’s left out will still require probate because you’ve made no other arrangements for it to pass to living beneficiaries.
Some people create “pour-over” wills to deal with omitted property. This type of will simply directs that anything you still own in your own name should go to the trust when you die. A pour-over will still requires probate.
You must also use a will to name a guardian for your minor children in the event of your death in most states. A trust can’t provide for this.
Learn more about how to write a will.
Will vs. Living Trust Considerations
There are many positive reasons to establish a trust but do not overlook the fact that it will involve more upfront effort and expense. To determine if you should make the extra effort and invest in the expense of a trust, answer these questions:
Is informal probate an available option? Most states have an expedited or simplified form of probate for estates under a certain dollar threshold (that dollar value varies by state). If your estate could pass under an expedited form of probate, or if you live in a state where probate is not a complex or burdensome process, a will could be appropriate.
Will you actively manage your estate plan? If not, a living trust may not be a suitable solution. Again, a trust will only be beneficial if assets are transferred into it.
So what is best for you? In many respects, a living trust and a will accomplish similar objectives. A trust, however, allows you to realize other objectives that a will cannot. Whether or not a living trust is better for you than a will depends on whether the additional advantages are worth the cost. When choosing, remember that one size does not fit all. What is right for one person may not be right for everyone. Your estate plan should be prepared in a way that best meets the needs of you and your family.
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