Regardless of your age or financial standing, proper estate planning is critical in order to ensure that your loved ones are looked after once you are gone, and that your assets are dispersed as you wish upon your death. Of course, when it comes time to begin the estate planning process, many people are overwhelmed by their options and are unsure what type of estate plan will be best for them. In particular, you are not alone if you are unsure what the difference is between a will and a living trust and how you will know which option is right for you, as a lot of confusion surrounds these two estate planning options.
While wills and living trusts are both common forms of estate planning that can be effective in helping individuals to transfer their assets to their loved ones when they die, there are distinct differences between these two options. Determining whether a will or a trust will work best for you will depend on your unique situation and what you are looking to get out of your estate plan. To help you make this important decision, here is a look at answers to just a few of the most common questions people have about wills and living trusts.
What Is a Will?
While wills are a form of estate planning that people are often the most familiar with, there is still a lot of confusion surrounding what wills can and can't do. A will is essentially a legal document that directs how your assets should be distributed upon your death. A will can then help to speed up and simplify the probate process by giving the judge presiding over the distribution of your assets a framework to go off of when making decisions regarding the handling of your estate. However, simply writing down your wishes does not constitute a legal will.
In order for a will to be valid, it must be filled out following specific guidelines, and it must be signed and witnessed. In addition to outlining how you want your assets to be handled upon your death, a will can also be used to appoint a guardian for your children should you die while they are underage. A benefit of wills is that they are easily revocable, which means that you can make amendments to them at any point during your lifetime up until your death.
What Is a Trust?
Alternatively, a trust is essentially a legal arrangement in which an individual transfers their property and assets into a trust where it is held for the benefit of the trust's creator during their lifetime. While any property placed into a trust technically belongs to the trust, the creator can continue to benefit from the trust as a trustee.
Upon the trust creator's death, the assets within the trust are transferred to the designated beneficiaries outlined by the trust, and the distribution of these assets is handled by a trustee the creator designated to take over the management of the trust after they die. Thusly, trusts can help to shield your assets, and your beneficiaries, from the stress and cost of the probate process, as assets within a trust are passed directly to beneficiaries without the need for the intervention of probate court.
How Are They Different?
How They Work
As you can see, there are a few key differences between wills and trusts in what they do and how they work. One of the primary differences between a will and a trust is that a will does not take effect until after your death, while a trust becomes valid and takes effect once you fund the trust by placing assets in it. It is important to remember, however, that trusts are only useful when they are funded. Assets that you do not place in the trust will still be subject to the probate process upon your passing.
Amount of Control
Another key difference between wills and trusts is that trusts can give you greater control over your estate, as you have direct control over what happens to the assets you place in the trust once you are gone. Alternatively, even if you have a will, the final decision regarding the distribution of your estate will be left up to a judge. With a living trust, you can also make arrangements for how you want to be taken care of should you become incapacitated and can no longer make decisions regarding your health and wellbeing. While incorporating power of attorney into your estate planning if you choose a will can afford you some protections should you fall ill, living trusts give you greater control by allowing you to specify how you are to be cared for should you become incapacitated.
Difficulty in Establishing One
Of course, one of the primary benefits that wills provide over trusts is that they are much simpler to establish. One of the primary reasons that wills are such a popular estate planning method is that they do not take long to set up and the process of doing so is affordable. Alternatively, living trusts are complex to establish and can be costly. Additionally, trusts require maintenance over the course of your life, which is not the case with wills. This can make trusts a more complex estate planning option that is less preferable for those who do not want to think about their estate plan once it is established. A living trust also does not allow you to make arrangments for the care of minor children. While you can stipulate in the trust how a child will be cared for financially upon your death, you can't designate a guardian in a trust.
How Do I Know Which Option Is Right for Me?
After learning more about wills, trusts, and the differences between these two estate planning options, you may find yourself asking how you will know which is right for you. Given how different wills and trusts are, it is understandable to be unsure which you should choose. Ultimately, whether a will or a trust will be right for you will depend on your circumstances and what you are looking for your estate plan to accomplish. However, considering a few important factors can help you make this important decision. A few things that you should consider when deciding between a will and a trust include:
Taxes
When trying to decide between a will and a living trust, it is important to consider the estate taxes in your state. One of the main reasons why living trusts are so popular is that they have the ability to lessen the amount of taxes your estate is subjected to. The fact is that you have worked hard for your money, and you will want as much of your assets as possible to go to your beneficiaries. While a living trust may be able to shield your estate from certain taxes, how beneficial this will actually be will depend on a variety of factors including the taxes in your state and the value of your estate. Depending on your unique situation, you may find the difference in the amount of taxes your estate would be subjected to with a will minimal.
Your Location
Ultimately, your location can greatly influence which estate planning option will be best for you. The fact is that laws regarding the handling of estates, including probate law and estate taxes, can vary greatly from state to state, and what may be advantageous in one state may not be in another. This makes it critical that you consult an estate planning attorney who can help you to determine what will work best given your unique situation.
Privacy
Of course, one of the biggest factors that you will have to consider when trying to decide between a will and a trust is how important protecting your family's privacy is to you. What many people do not realize is that when an estate goes through probate, the estate, its contents, and how it is ultimately divided all become public record. While this may not be of concern to everyone, if your family's privacy is of the utmost importance to you, then you may want to consider establishing a trust in order to keep as much of your estate as possible out of probate and the public record.
Your Potential Trustee
A big factor in determining if a living trust will work for you is whether or not you have someone who you can trust to be a trustee after your death. Naming a trustee is a serious decision, as you must be able to trust the person you choose to handle your estate in the way you would want without court intervention. The fact is that unless you have someone in mind who you can trust completely to handle your estate, a will might be a better option as the handling of your estate would then be overseen by a judge.
The Importance of Partnering With an Estate Planning Attorney
As you can see, choosing the right type of estate plan can be a complicated decision that will depend on a variety of factors. Many people find choosing a will and a trust to be the best option, as adding a "pour-over" will to your estate plan on top of a trust allows you to make plans for assets that are not included in your trust, ensuring that your entire estate is handled according to your wishes after you are gone. However, considering how complicated the estate planning process is, it is recommended that you consult an attorney before you make any final decisions regarding your estate.
An attorney can walk you through your options and help you to decide what type of estate plan will be best for you, and they can help you to draft a valid estate plan that will hold up after you are gone. Contact us to learn more about your estate planning options as well as to find out how we can help you to prepare for your family's future.
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