When it comes to estate planning, one size does certainly not fit all. Everyone’s life and personal circumstances are unique and different. It is for this reason that deciding between creating a will or a living trust when preparing an estate plan can be a tough decision. It is important to understand the differences between the two before making a decision on what works best for your life situation.
What Is a Living Trust?
A living trust is a legal document that governs the assets and title to property for a designated beneficiary. A living trust allows the grantor or creator of the trust to maintain control over the assets and to make changes to the document, including completely revoking it, during his or her lifetime. Living trusts are most commonly used to avoid probate, a process that is required for anyone who dies with or without a will. Since the assets are owned by the trust and not the creator of the trust, they pass according to the directions of the trust document, making the probate process not necessary.
What Is the Purpose of a Living Revocable Trust?
As stated above, a living revocable trust is often created as a way to avoid probate and allow loved ones to receive property from a deceased relative without having to go through the court system. Probate can be a lengthy process, and with a trust, property can be transferred quicker with less interference. In addition, many individuals choose to prepare a trust so that they can control how property is distributed to their beneficiaries and when it is distributed. A trust is also used to for its tax benefits as property distributed through a trust is not subject to the federal estate tax. It depends on the grantor’s specific situation, but one or all of these considerations can be why a trust is prepared in lieu of a will.
What is the Difference between a Will and a Living Trust?
When it comes to discussing estate planning, the terms “will” and “trust” are often used together, but they are two very different entities. A will goes into effect after the testator dies while a living trust becomes effective as soon as the document is executed. Once written, a will or a revocable trust can be revised as many times as the testator or grantor wishes, so long as he or she is mentally competent. Unlike a will, property that is put into a trust can be handled by a third-party while the grantor is alive, if the successor trustee takes over management of the trust before the grantor dies.
A will deals with the disposition of property that the individual owns in his or her sole name at the time of death, but a will does not deal with assets that go directly to a beneficiary outside of probate, like a life insurance policy or any property held in joint tenancy with right of survivorship. A trust deals with property that has been funded into the trust, and it can include retirement accounts, life insurance policies or any property that is owned in a tenancy-in-common situation. Many people choose to name the beneficiaries of these of these policies as their trust instead of an actual person. This designation means the proceeds flow directly into the trust upon the death of the policyholder.
Another key difference between a will vs a living trust is that a will requires the probate process to legally transfer the deceased’s property to named beneficiaries. However, under a trust, the property can be transferred completely outside of the legal system. The transfer arrangements are detailed in the trust agreement and can occur before the grantor dies, if the trust agreement dictates. The trust also provides for circumstances that occur during the grantor’s lifetime. Unlike a will, the trust provides for the grantor in the event of mental disability or incompetence. Without the provision of a trust, the relatives and loved ones of the covered individual will need to file a legal action to have a conservator or guardianship appointed. If a trust is in effect, that will not be necessary.
Both a trust and a will allow the individual who creates the document to name beneficiaries to receive his or her property. In a will, the property goes through probate to the beneficiaries. In a trust, the property must be transferred to the trust, and the property then goes to the beneficiaries upon the direction of the trust terms. If the beneficiaries are minors, they are not able to receive property until they reach the age of 18. Therefore, under a will, the property will need to be managed by an adult, which is normally the guardian designated in the will. However, in a trust, the trustee manages the property and ensures the money is protected for the minor beneficiaries until they reach an age determined by the grantor.
What Are the Types of Living Trusts?
Several different types of trusts exist, each with its own set of protections and requirements. The most common type of trusts are the revocable living trusts. In a revocable living trust, the grantor funds his or her property into the trust, usually remaining and acting as trustee during his or her lifetime. The term “revocable” means that the terms of the trust can be modified, changed or revoked as much as the grantor wants so long as he or she is alive and competent. Once the grantor dies or is deemed incompetent, the trust becomes irrevocable and can no longer be modified. If the trust is irrevocable from the start, the property is moved into the trust and is under the care and control of a trustee who is someone other than the grantor. Once the trust is created and property moved into the trust, it cannot be taken back or undone. The third type of trust typically used is a testamentary trust. These trusts are created by the testator, which is the person who writes a will. The trusts do not technically exist until the testator dies, and the trust is created as part of the probate process.
What Is in a Living Trust?
The key information that needs to be in a trust is who will be in control of the trust property after the trust is created, including who will succeed the original trustee or grantor after he or she dies or is incapacitated. The trust will describe precisely to the trustee what his or her fiduciary duty to the beneficiaries are. This fiduciary duty requires the trustee to act solely in the best interests of the beneficiaries. The document consists primarily of directions to the trustee on how the property will be handled, including directions for taxes and any other financial direction that may be needed. A trust includes many different provisions to dictate how property is distributed to beneficiaries. If the grantor has requirements on how old beneficiaries need to be before they receive property, this will be included in the trust directions. A trust will also include specific legal provisions to protect the beneficiaries in the event the trustee goes rouge and does not act in the best interests of the beneficiaries, including what the process will be to remove that trustee and appoint a successor.
Do I Need a Will or a Living Trust?
Many individuals ask whether it is better to have a will versus a living trust. For most situations, a will is enough to cover the individual’s basic needs. However, some situations do call for a living trust. Whether someone needs a living trust depends on that person’s age, wealth, and marital status. It also can depend on whether that person has children, how old the children are and whether any special circumstances exist regarding the children and their needs. If an individual is young and does not have much property to his or her name, a will may be all that person needs for an estate plan. If someone does not have much property at any age, other outlets may exist for that person to protect his or her property from probate. For instance, if all the person has is one home and no other significant property, a quitclaim deed may be all that person needs to transfer property outside of probate. Alternatively, if someone has a significant amount of wealth, it is a better idea to prepare a trust to save on probate costs, including inventory fees that are often required to be paid before a case can be closed.
How Much Does It Cost to Set Up a Trust?
Trusts are fairly complex documents, and to properly prepare the document and to then title property into the trust, requires the assistance of an estate planning attorney. It can be tempting to try to create the document without the assistance of an attorney to save on costs, but in the end, if something is not properly prepared or completed, the creator of the trust can end up costing his or her relatives or beneficiaries thousands in attorney’s fees later if the beneficiaries have to take the matter to court. It helps to pay for professional assistance in preparing the document upfront rather than run the risk of causing problems later. How much an estate planning attorney will charge to prepare the trust document depends on the experience of the attorney, the circumstances behind the trust and the state in which the creator lives. The average cost to set up a living trust can range from $1,000 to $1,500 for an individual and $1,200 to $2,500 for a married couple. These numbers are just a general estimate, however, and can vary on location and attorney hired.
Cons to Having a Living Trust
Living trusts do have negative aspects, as well. They tend to be more involved and time-consuming when it comes to creating them. Writing up the trust is only a small part of the process. Many individuals create the trust only to fail to fund the trust, meaning they never change the title of their property to the trust. By doing this, they end up needing to go through probate even though the whole purpose of creating the trust was to avoid probate. They are also more involved and complicated to modify if modifications are needed down the road.
Does a Will Override a Trust?
Normally, the most recent estate planning document prevails when there are two different documents, such as a trust or will, in dispute. In fact, when a new will is created, one of the first provisions in the document is to revoke any prior wills or codicils. A trust can be mentioned, as well, if it is the testator’s wish to revoke the trust. In the event someone does wish to revoke a trust and use only a will, it is important that he or she retitle property so that the trust no longer owns the property but rather the individual himself or herself. Otherwise, that property will remain titled to a document that has otherwise been revoked, which can make for a fairly complicated situation.
Can You Have Both a Will and a Living Trust?
Many estate plans include both a living trust and a will. If an individual has minor children and wishes to dictate his or her wishes on who is the guardian for those children, this information would be included in a will. In addition, most estate planning attorneys prepare what is known as a pour over will where the beneficiary of the will is the individual’s trust. The purpose of this pour over will is to protect the grantor in the event he or she failed to title a certain asset to the trust. Any assets that are not in the name of the trust would then flow through the pour over will into the trust. These types of wills are standard for any trust, whether it be revocable or irrevocable.
At the end of the day, what may work for one individual may not work for another. Before making a decision on whether a living trust vs a will is the right fit for you, it is recommended that you seek the advice of an experienced estate planning attorney to discuss your specific life circumstances and needs.