For most people that are just starting to learn about Estate Planning, one of the first questions they usually have is: what is the difference between a Will and a Living Trust? And do they need a Will, a Trust, or both? This article will cover the basics of Wills and Trusts and talk about how they can be utilized for Estate Planning purposes. Before we get into the differences between Wills and Living Trusts, it is important that you understand what Estate Planning is and what it can do for you.
What is Estate Planning?
Quite simply, Estate Planning is the process of making arrangements to control your property while you’re alive, take care of yourself and your loved ones if you become disabled, and to give what you have, to whom you want, the way you want, and when you want. Furthermore, use proper Estate Planning techniques should be used to save every last tax dollar, professional fee and court costs.
What can Estate Planning do for you?
Estate Planning will give you the peace of mind that you and your possessions, belongings, and assets are handled in the way you desire. Here are just some of the things that can be addressed with proper Estate Planning:
- disability planning
- facilitate business transitions;
- long term senior care;
- end of life decisions;
- funeral and burial arrangements;
- provide for your family;
- asset distribution;
- real estate disposal;
- fund charitable contributions;
- minimize expenses;
- ease the strain on your family; and
- provide pet care for your animals.
What is a Will?
A Will is just one of the many tools utilized in Estate Planning to accomplish your goals. A Will, also commonly referred to as a Last Will and Testament, is a legal document that memorializes your final wishes – but only for a judge. More clearly stated, a Will is a set of instructions for a judge, which has no legal significance during your life. Compare this to a Living Trust, which has immediate affect (such as identifying who will deal with your assets during incapacity). A Will is also filed in court (after you pass away) and is thus public information, whereas a Living Trust is a private document, which is only filed in court in case of a dispute. A Will is also important to name guardians for any minor children.
What can a Will do for you?
A Will is the most commonly well-known and understood Estate Planning tool. A Will enables you:
- to determine for yourself, instead of state law, how your assets are distributed;
- to disown heirs if you wish;
- leave assets to beneficiaries that are not heirs, including but not limited to friends, distant relatives, and charitable organizations;
- to provide for beneficiaries that are too young or otherwise unable to handle receiving assets;
- to choose a guardian for minor children; and
- to select an executor for your estate.
As you can see, a Will is an important tool in the Estate Planning tool box to help give you piece of mind that your Estate will be handled in the way you desire.
What can a Will not do?
A Will can be very useful but it’s also important to understand it’s limitations. A Will cannot, or more accurately, should not be used to:
- gift any asset that is jointly titled;
- gift any assets already included in a Living Trust;
- gift life insurance proceeds, if the life insurance policy already has a designated beneficiary;
- gift money that is in a retirement account, 401(k)s, IRSs, etc.; and
- communicate end of life decisions and desired funeral arrangements.
Most importantly, a Will does not enable you to avoid or eliminate the probate process. It really functions as a road map for your loved ones to navigate the probate process.
Do I need a will?
If you own real estate, our recommendation is to have a Living Trust and a Will. However, if you don’t own any real estate (or other assets that may not have beneficiary designations), then having a Will is an important document to let you decide how to distribute your assets, rather than the court doing it for you. Therefore, if having control over the distribution of your Estate is important to you, then you should contact a lawyer to draft a Will.
What is a Living Trust?
A Living Trust is a tool used in Estate Planning to accomplish several goals, such as private disposition of your assets, probate avoidance, incapacity planning and, in some cases, tax minimization. The Living Trust appoints a third party, known as the trustee, to hold assets on behalf of your beneficiaries. Living Trusts can be set up and arranged in many ways so that you can specify when and how assets are given to your beneficiaries.
What can a Living Trust do for you?
Assets owned by Living Trust are not part of your eventual Probate Estate, so your beneficiaries can gain access to the assets quicker than if they were transferred using a Will. Also, since the Living Trust assets are not disposed of through Probate, your heirs are spared the significant time, expense and annoyance of dealing with the Probate process.
A Living Trust can also allow you to specify when distributions are made to your beneficiaries, which is usually an important consideration for grandparents and parents of young children, or those with special needs. A Living Trust can also be established to allow assets to remain accessible during your or someone else’s lifetime. These tools can be extremely helpful, for example, when there are children from more than one marriage. Creating ongoing “Dynasty” Trusts (which is possible to create within a Living Trust) can also aid in protecting your heir’s inheritance from your beneficiaries’ creditors.
What can a Living Trust not do?
There are several types of Trust, including living, revocable, irrevocable, charitable, constructive, etc. We will cover the different types of Trusts and what they can and can not do in a future blog posts but for today it’s important to know that most trusts are not protected from your creditors or liability. It is a common misconception that a Trust will protect your assets from creditors and or liability if you were to be sued. For our Estate Planning conversation today, it’s important to note that is not usually the case and if asset protection is the goal that’s a separate conversation you’ll need to have with your lawyer.
Do I need a Living Trust?
As shown, Trusts can be a great vehicle to control how and when your assets are distributed to beneficiaries even after your death. If you have young children, young grandchildren, or even anticipate having grandchildren after your death a Living Trust mat be a planning tool you should consider. Living Trusts are also a great way to provide monetary assistance for any pets you may need to have cared for after your death. Even if those are not concerns for you, the avoidance of additional taxes and court fees may make it a worthwhile Estate Planning tool to consider. Our general recommendation is to setup a Living Trust as soon as you own real property, since a Living Trust is the best instrument / vehicle to control and own that property. Remember, Living Trusts are revocable, which means they are designed to be amended throughout your lifetime.
We hope that this article helped you learn about Wills and Living Trusts, and how they can help you accomplish your Estate Planning needs.