When it comes time to consider how you will protect the assets you have worked hard for throughout your life and pass them on to your family once you are gone, there are a number of options for you to consider. One question you might be asking “What’s the difference between a Will vs. Living Trust?” Finding the right fit for your Estate Planning needs requires a careful consideration of your personal circumstances as well as your wishes, and the answer to Living Trust vs. Will may require a lot of careful consideration to determine the right fit for you. This post will examine what is a Will and what is a Living Trust and compare the difference between a Living Trust and Will.
What Is a Living Trust?
A Living Trust is essentially a legal entity you can create with the help of your attorney which can hold ownership of the assets you transfer to the Trust. It is referred to as a “Living” Trust because unlike some other Estate Planning tools, it is created and operates while you are alive. Ordinarily, this type of trust remains “revocable,” meaning you can retrieve your assets from the Trust, make any changes to it, or even dissolve it completely while you are alive; and it then becomes “irrevocable,” or unchangeable, once you die. The Trust invests the assets to benefit the Beneficiary, which tends to be the person who set up the Trust (the “Grantor”) during the Grantor’s life and will have a Successor Beneficiary or Beneficiaries who will become the Beneficiaries upon the death of the Grantor.
The individual who makes decisions for the Trust is called the Trustee, and in this type of Trust is usually the Grantor during the Grantor’s life. In addition, the Grantor normally names a Successor Trustee who will manage the Trust if the Grantor is unable to do so due to death or mental incapacity.
A Living Trust helps you by allowing you to know that your assets will be protected and managed if you become unable to manage your own affairs and can be easily distributed upon your death. One common reason that people choose to utilize a Trust is that any assets owned by the Trust will not have to go through the Probate process to be distributed to your heirs. Instead, you can designate your heirs to become the Beneficiaries upon your passing. The Trust can then be structured in several ways and can immediately distribute your assets among the Beneficiaries or distribute the assets over time in amounts you have specified.
The Successor Trustee can be one or more of your heirs, or if you have concerns about their ability to divide up or manage the assets owned by the Trust according to your wishes, you can also designate a professional fiduciary who can manage the Trust in the way you desire.
What Is a Will?
A Will is a legal document that you (the “Testator”) create with your attorney to indicate what will happen with your assets after you pass away. All of the things you own, whether the real property (e.g., your residence, investment property, etc.) or personal property (anything from vehicles to picture frames and everything in between), are considered part of your “Estate” when you pass away. In your Will, you designate someone to manage your Estate after your death, an “Executor.” The Executor’s role is to ensure all items in the Estate are distributed according to the wishes of the Testator.
In your Will, you will designate who you want to receive the items in your Estate after your death, and additionally, may designate a Guardian for your minor children and dependents. Anyone who will receive any property under the terms of your will is considered a Beneficiary.
There are certain assets which cannot be distributed under a Will, including most insurance policies, pensions, or retirement accounts. Typically, those accounts and policies require you to designate your future intended Beneficiaries at the time they are opened or set up. Keep in mind, for any property that is jointly owned by you and someone else, the only thing that will pass to your Beneficiaries under your Will is your interest in the property in question. Your Beneficiaries would essentially step into your shoes and co-own that property with your co-owner. Not to mention, joint ownership of real property fails to take advantage of a very important tax benefit known as a basis step-up. Read more about that here.
When you pass away, all the property you own is deemed to be owned by your Estate. In order to distribute those assets to your heirs, the legal process referred to as “Probate” will be initiated by your Executor to have the wishes you set out in your Will carried out. If you die without a Will in place, your Estate assets will still be distributed through Probate, but the court will appoint an Administrator to determine, under the law, who is entitled to the assets of your Estate and to distribute them accordingly.
The Differences Between a Will and a Living Trust
While both Wills and Trusts help to effectively distribute your assets once you pass away, the difference between a Living Trust and a Will are numerous. If you are considering a Will versus a Trust, some of the differences to think about include:
-Trusts cannot be used to designate a Guardian for any minor children or dependents, while Wills can. However, when you create a Living Trust Estate Plan, if you have minor kids, you should have both a Trust and a Will. The Trust will be used for everything, except the Guardian nominations, which cannot be accomplished with the Trust.
-Wills must go through the Probate process, but Trust assets do not.
-A Trust may be utilized to set up an asset manager in the event you become incapacitated, but a will cannot do that.
-Setting up a will is relatively easy and affordable, while a trust setup can be more expensive due to the need to create the trust documents and transfer ownership of assets to the trust.
When considering a Living Trust vs. a Will, there are a number of important factors to consider. Often times, people assume that, because their situation is “simple”, a “simple” Will can suffice for their planning needs. These same people wonder whether Trusts offer more benefits than Wills, but because their situation is “simple”, there is no need to complicate matters with a Trust. It’s important to realize that while Wills and Trusts both have unique features, Trusts are not just for rich seniors, which is the prevailing but false narrative. Trusts are important and have more benefits than Wills for young adults, parents with minor kids, investors, current homeowners, future homeowners and, for that matter, anyone who is concerned about making life easy for themselves and their loved ones, in the event of incapacity or death. With all that said, once you understand that both a Will and Trust serve different and complimentary purposes, the question of Will vs. Trust becomes less important, because it’s not a matter of which to use, but instead, you use a combination of both.