Most of us have at least a cursory knowledge of what estate planning is and why it’s important in general. But it’s important to know there are numerous options for estate planning which can address specific life situations, as well as remove burdens from and legally protect our loved ones after we die.
The two most common legal documents used for estate planning are living trusts and wills. Let’s take a look at how these tools for estate planning are alike and how they are different.
What is a Living Trust
Most of us have at least a basic understanding of what a will is but may be a little fuzzy on what a living trust is and why it’s different from a will.
Like a will, the living trust document is a legal document that states who will manage your estate and receive your property when you die or if you become otherwise incapacitated. However, we will see later how living trusts and wills are different.
Why is it called a living trust? In simple terms, because the trust is created during the grantor’s lifetime and may be changed while the grantor is alive, it is considered “living.” A living trust is also known as a revocable living trust since its provisions can be changed or nullified during a person’s lifetime.
How Are Wills And Trusts Alike?
Living trusts and wills share many similarities, but they are very different processes that serve different purposes.
Here are just a few ways trusts and wills are similar:
- Both outline provisions for the distribution of assets, contingent upon specific conditions as indicated by the document’s creator.
- Both can name beneficiaries for property.
- Both allow you to appoint a guardian or guardians for your children.
- Both can allow you to make provisions for minor children in the event of your untimely death.
- Both allow you to make changes to the provisions during your lifetime.
- Both allow you to name someone to take over your affairs and manage your estate after you pass. In the case of a will, this person is called an ‘executor.’ For living trusts, this designee is called a ‘trustee.’ Both have the right to pay bills, manage administrative tasks and control how property is distributed after you die. For peace of mind, you may also select a “successor trustee” who assumes responsibility for the trust if the first trustee dies or becomes unable to perform their duties.
- Both allow for an institution, such as a bank, to be appointed as your executor or trustee. This is called a professional trustee.
- Both wills and living trusts allow you to instruct how debts and taxes are to be paid from funds specifically designated by you.
How are Living Trusts Different From Wills?
Unlike a will, a living trust is considered a wholly separate legal entity from yourself. As such, it provides certain protections a will cannot. There exist some important distinctions between the two, and it’s important to understand them as you create your estate plan:
- Perhaps one of the biggest benefits of creating a revocable living trust is the protection it offers against probate court. If you only have a will, your property must by law go through probate court proceedings, only after which it can be released to your family or designated heirs.
Not only can the probate process be riddled with delays and headaches, but it can also become extremely expensive as well. In fact, the cost of probate can be double, triple or even quadruple the expense of setting up a living trust. Many people create a living trust in order to save their family time and money later.
- Because the law views assets placed in a trust as separate from you, your property must be transferred to the living trust. Any real estate must be retitled as property of the living trust, which is a simple as changing your deed from “John and Mary” to “John and Mary, Trustees.” (You will appoint yourself as trustee, which allows you to maintain total control over property placed within the trust.)
- A living trust provides an important layer of privacy after your death. Unlike a will, a living trust does not become a public record.
- Unlike the beneficiaries of a will, the recipients of the property in a trust will not be liable for inheritance or estate tax. They may still be subject to the federal gift tax, however.
Both wills and living trusts outline provisions for property distribution and estate management after you die, and both provide flexibility over those provisions and a level of control over your property while still alive.
But as discussed before, there are important differences between the two, and it’s advisable to talk with an attorney specializing in estate planning before deciding which is right for you. You may even find that you do not have to choose between the two. Many people establish a living trust as a supplement to their will to provide added protection to a portion of their estate and the beneficiaries.
The professionals at Port Legal are experts in both wills and living trusts. Click here to set up a free, no obligation consultation today.