When it comes time to develop your estate plan, you need to ensure that you utilize all the available tools. Living trusts and wills are two of the most common tools used for estate planning. Both allow you to transfer assets to friends and loved ones, but there are some big differences between the two. When it comes time to discuss your estate planning needs with your estate planning attorney, having a working knowledge of how each works and the differences between the two is imperative. Keep reading to learn the ins and outs of wills and living trusts as well as how to decide exactly what you need.
What Is A Will?
A last will and testament is a legal document that allows for the distribution of your assets and property upon death. It can also contain your final wishes regarding burial and funeral services. The will should also contain a listing of your assets and debts as well as any specific devises such as a family heirloom or collectible. Upon your death, the will must go through the probate process. This means that the probate court must approve all distributions.
The legal process known as probate can be lengthy and expensive, and it also becomes public record. This means that the details of your estate could be discovered by anyone who is interested. A will also allows you to name guardians for your minor children. This is an important estate planning tool that everyone should have regardless of the value of your estate.
Without a will, your property will be distributed according to the intestate succession laws in your state. This may or may not result in the distribution that you would actually want. Particularly, if you wish to disinherit a child or spouse, a will allows you to accomplish this in most cases. However, if you die without a will, then the law states exactly who will get your belongings. The only exceptions are assets with named beneficiaries like life insurance policies, IRA’s, 401(k)’s, and some other bank accounts.
Wills may also be subject to will contests by potential heirs. For example, a son or daughter may challenge the will because they believe they were not granted a proper inheritance. This can tie up the entire estate in court for years and prevent anyone from receiving their inheritance until the challenge is resolved or settled.
What Is A Living Trust?
A living trust is a trust that is created during the lifetime of the grantor, or the person creating the trust. The trust documents will name a trustee and beneficiaries. The trustee has a fiduciary duty to the beneficiaries and must manage and maintain the assets in the trust for the benefit of the beneficiaries. In contrast to a living trust, a testamentary trust is created after the grantor’s death through provisions in the will. You might be wondering, “What is a trust?” A trust is simply a legal entity that allows a trustee to manage assets for the benefit of one or more beneficiaries. The IRS also provides information on what meets the definition of a trust. There are two main types of trusts – revocable and irrevocable trusts.
Revocable Trust
A revocable living trust is one that may be changed, amended, or even revoked at any time during your life. You maintain full control of the property in the trust. A person will typically name himself as trustee during his lifetime, and the trust documents will appoint a successor trustee to assume control at the time of your death.
One important benefit of a revocable living trust is the fact that it allows you to pass assets to their beneficiary designations without going through the probate process. This typically saves time and money, and it also avoids potential challenges to a will. In addition, trusts are private documents as they do not become public record. This allows you to maintain privacy during the settling of your estate.
A trust also protects you from the possibility of needing a conservatorship should you become incapacitated. The trust agreement continues to operate even if you reach incapacity. One thing that a trust does not allow you to do is name a guardian for young children. If you have minor children, then having a will is an absolute must!
Irrevocable Trust
The benefits and purpose of an irrevocable trust are quite similar to a revocable trust. However, an irrevocable trust cannot be easily changed or revoked. In fact, by the very nature of it, an irrevocable trust cannot be changed once it is formed. The only exception is when all beneficiaries agree to the change. Irrevocable trusts offer some additional benefits over revocable trusts. They can provide tax advantages; however, those advantages come with a few drawbacks. Once you place property into an irrevocable trust, you lose control and ownership of that property. The trust wholly owns that property, and the trust property is managed by the trustee according to the trust documents.
How To Create A Will Or Trust
When reviewing your estate planning options, you will likely decide that you need to create a will or a trust – or maybe even both! Creating these documents is not extremely difficult, although they do require some expertise that the average person usually does not possess. The specific rules vary by state, but in general, the process for creating a will or trust is about the same across the board. Here is what to expect when it comes to creating a will.
First, you should make sure that the will lists your assets and debts. You will want to ensure that you specifically note in the will who should receive your assets. When it comes to distributions, you can list specific items in the will along with which family members or friends are to receive them. Once you have covered all the specific items, you can list a person to receive the remainder of your estate. Also, if you have minor children, you should name a guardian and an alternate guardian for those children. Be sure to name an executor and alternate executor for your estate. Make sure that your will is signed, and in some states, it should be notarized and include specific language to make it a self-proving will.
When it comes to establishing a trust, the document should name a trustee and beneficiaries. It can also direct specifically how the assets are to be managed and distributed. Once the trust documents are executed, you will need to fund the trust. That means that ownership of the assets will need to be transferred to the trust instead of personal ownership. With either a will or a trust, there are very specific rules that must be met. You should likely consult an estate planning attorney for help in drafting the documents to ensure that they comply with the local laws in your area.
Key Differences Between Wills And Trusts
Wills and trusts can both be used to pass property to heirs or beneficiaries; however, there are distinct differences between these two documents. A will is created during your lifetime, yet it does not become effective until your death. However, a trust becomes effective immediately upon the creation of the trust. Living trusts are created during your lifetime, while testamentary trusts are not created until after your death.
Trusts offer large tax advantages that are not available with a simple will. To distribute your property with a will, your entire estate must go through the probate process. This means that your estate will be subject to estate taxes, and it will become public record. However, a trust allows you to pass property outside of the probate process. This can result in significant tax savings, and it also allows you to maintain privacy for your estate.
If you have minor children, then having a will is imperative. You can use a will to name guardians for your minor children in the event of your death. However, a trust cannot be used for this purpose. In addition, a trust remains in effect should you become incapacitated. Without a trust or durable power of attorney, then the court would need to appoint a conservator to handle your affairs during your incapacity. Remember that a will only takes effect after your death, so none of its provisions would apply during incapacity. Here are some more quick comparisons between a living trust and a will in an easy to read format.
| Differences Between Living Trusts And Wills | ||
| Living Trust | Will | |
| Timing of Effectiveness | Upon signing | At death |
| Open to Challenges | Not generally | Yes |
| Subject to Estate Taxes | Not generally | Yes |
| Modifications | If revocable – at any time during life.
If irrevocable – only if agreed by all beneficiaries |
Yes, can modify during lifetime |
| Appointment of Guardians | No | Yes |
Average Cost Of Wills And Trusts
Wills and trusts are usually not cheap, but it is absolutely necessary that you make sure you have the appropriate documents in place. The cost of these items is usually proportionate to the size of your estate and the complexity of your goals. If you have a small estate, you might be able to get a simple will for as little as $150. Simple trust documents are typically a little more expensive and probably start around $250. However, if you have a large estate that is very complex, a detailed will could cost you upwards of $5,000. Similarly, extremely complex trust documents can run in the thousands of dollars. Once a will has been executed, there are no additional costs associated with it until the probate process begins at the time of your death. However, trusts do have on-going costs, particularly if you have hired a third-party trustee. The annual fees for managing a trust can range from a few hundred dollars to several thousand dollars, again depending on the value and complexity of the assets.
The Bottom Line
Living trusts and wills are two separate and distinct legal documents that can be used to accomplish similar goals. However, each has some unique features that need to be considered. Many people end up needing both of these documents to form a complete estate plan. You should consult with an estate planning attorney who is experienced in trusts and estates to review your assets and goals to determine what is right for your situation.
Frequently Asked Questions
Which is better: a will or a living trust?
When evaluating a living trust vs will, it is impossible to say that one of these documents is better than the other. Each is unique and provides certain benefits that the other does not offer. For example, a will can be used to appoint a guardian for minor children, while a trust cannot. On the other hand, a trust offers certain tax advantages for the distribution of property that wills do not offer. An experienced attorney can help guide you to the best choice for your specific situation. In many cases, people end up needing both of these documents to adequately handle their estate planning needs.
Does a will override a living trust?
No, a will does not override a living trust. Once you place items into the trust, those assets are then owned by the trust. They are no longer part of your personal estate. Therefore, any assets in the trust are not governed by the terms of your will. A will can only distribute items that were owned by the decedent, not items that are owned by a trust created by the decedent during his or her lifetime.
Why have a living trust instead of a will?
A living trust offers some advantages over a traditional will. First, a living trust allows you to avoid the probate process, and it also provides additional privacy. The terms of the trust will not become public record, and the beneficiaries will be able to receive their inheritance faster. Living trusts can also help avoid challenges to a will, and they can provide some major tax advantages. When done properly, a living trust can accomplish almost everything that can be accomplished with a will while still offering the advantages mentioned above.
What are the disadvantages of a living trust?
One of the biggest disadvantages of a living trust is the fact that you must give up ownership of your assets. Once the assets are placed in the trust, they are then owned by the trust and not you. Depending on how the trust is established, you might still be responsible for paying income taxes on assets within the trust from your own personal account. In addition, if you have minor children, you cannot name a guardian for those children in the event of your death using a living trust. Finally, another disadvantage can be the living trust cost. It can be expensive to establish and maintain a trust, so you should take that into account when considering a trust.