Regardless of its size, the goal of an estate plan is to facilitate the transfer of property and assets to your family with the least amount of cost and friction. As you work through the planning process, you have several tools at your disposal, including a will, power of attorney, medical directive, and trusts—all playing a critical role in ensuring your wishes are carried out with the least number of complications for your executors and heirs. Understanding what is a living trust is key to making informed decisions about your estate.
Chances are, if you have looked into an estate plan, you have heard a lot about living trusts as a way to avoid the delays and cost of probate. Assets assigned to a living trust during your lifetime are passed directly to the trust’s beneficiaries upon your death outside of probate court and to the exclusion of any creditors. Acting as trustee until your death, you control the trust and its contents with the right to revoke or cancel at any time. Deciding between will vs trust can impact how smoothly this process goes.
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What is a Living Trust?
A living trust is a legal document that allows an individual, known as the grantor, to place their assets into a trust during their lifetime, with instructions on how those assets should be managed and distributed upon their death or incapacitation. The grantor typically serves as the trustee, managing the trust’s assets while alive, and designates a successor trustee to take over management upon their death or incapacitation.
One of the main advantages of a living trust is that it helps avoid the probate process, allowing assets to be transferred directly to beneficiaries without court involvement, saving time and potentially reducing legal fees. Unlike a will, a living trust also provides privacy, as it does not become a matter of public record. Additionally, it can offer ongoing management of assets if the grantor becomes incapacitated, ensuring that their financial affairs are handled according to their wishes.
Who are Living Trusts for?
On the surface, the advantages of a living trust are very appealing, and they’re not terribly expensive to set up—though they do require updating at times. Still, in many situations, the benefits of a living trust are so minimal they may not be worth the time and expense. In fact, in some cases, they can cause more complications. In truth, living trusts may not make sense for most people, especially when considering living trust vs will.
For example, if you and your spouse jointly own your assets and plan on leaving them to each other, there is no need for a living trust because those assets don’t go through the probate process. Or, if your assets are held in accounts, such as a bank or brokerage account, or retirement account, they can pass by beneficiary designation just as with a life insurance policy. You just need to make sure you have assigned beneficiaries to the accounts. In these situations, a will would suffice, highlighting the distinctions in will vs trust planning.
In most states, smaller estates with less than $50,000 of assets and no real estate can bypass probate with a simplified, out-of-court process. Generally, the average estate doesn’t include enough assets to require formal probate, so it doesn’t make sense to add the complexity of a living trust to the plan. What is the difference between a will and a trust? Primarily, the use of a trust is more about avoiding probate and managing assets during your lifetime.
When a Living Trust Makes Sense
Under some circumstances, a properly drawn living trust can make good financial sense, such as when:
- You Want to Treat Beneficiaries Differently: It’s not uncommon for parents to want to divide up the estate in ways that treat one child differently from another—either in the type of assets they are to receive or the value of the assets. A living trust can spell out how all beneficiaries are to be treated, and they are more difficult to contest than the directives of a will.
- You Want to Distribute Assets According to a Timetable: If you have younger children who may not be ready to receive assets, you can establish a timetable for the executor to follow in distributing the assets.
- You Own Out-of-State Properties: If you own a vacation home or investment property in a state different from the state in which you reside, it may be required to go through probate in that state. A living trust can facilitate the transfer of real estate outside of probate.
- You Own a Business: If you own a business, the last thing you want is to have it tied up by a probate court before your business continuation plan can take effect. That is a circumstance where a living trust is needed.
- You Have a Lot of Assets: Generally, the greater the value of your estate, the more time and money you can save for your heirs by avoiding probate. Estates valued at $10 million or more would benefit from a living trust.
Living Trusts: Revocable vs Irrevocable
A common question in estate planning is revocable vs irrevocable trust: which is better? A revocable trust allows the grantor to make changes or cancel the trust during their lifetime. In contrast, an irrevocable trust cannot be altered once it is established without the consent of the beneficiaries. Each type of trust serves different purposes and offers different protections, especially regarding asset protection and tax implications. The choice between these options depends on the specific needs and goals of the individual.
Next Steps in Deciding Between Wills and Trusts
It’s essential to note that these are only general guidelines for determining if you should consider a living trust. While nearly everyone can benefit from a will and a power of attorney, it would be important to consult with your financial advisors as well as an experienced estate or probate attorney to see if a living trust could improve your estate plan and help you avoid the probate process. Understanding what is the difference between a will and a trust is crucial in making the right choice for your estate planning needs.
Wills and trusts serve different functions and can be tailored to fit the unique needs of your estate. By exploring wills and trusts, you can find the right balance to ensure your assets are managed according to your wishes and that your loved ones are taken care of. Whether you decide on a living trust or stick with a traditional will, knowing your options is key to effective estate planning.
