Living Trust vs Will: What’s the Difference?

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living trust vs will

Understanding the difference between a living trust and a will is crucial. Nobody wants to think about what will happen after they pass away, but it’s critical to be ready for it on paper. To prepare your family and friends properly for the unexpected, you will likely need to have a plan in place. Understanding how your assets will be distributed and how any dependents will be cared for moving forward is paramount to ensuring everyone can process your passing with the least stress.

However, there are various options when creating a plan, and finding the right solution for your situation can be difficult. This article will examine two of the most common estate planning options, a will, and a living trust, to help guide decision-making.

A Plan or the Probate Process

To better understand why having a plan in place is a good idea, it is beneficial to consider the alternative briefly. If you do not have a will, trust, or other estate plan, the property that you leave behind will go through the probate process without a clear roadmap for how it will go. While not every plan will allow you to avoid probate court, it provides a picture of the deceased’s final wishes and helps the surviving family understand the plan.

The probate process is a system where the descendants and anyone claiming the assets owned at death will divide the property. Probate court can be complex, especially when the probate proceedings bring up difficult family issues and put them on public record. There may not be an adequate consideration of the financial needs of the surviving spouse or how the executor or the court will need to distribute assets. Because the probate court will have the final say, it is best to make your final arrangements a part of your plan long before you pass away.

The Basics of Wills

A last will is a legal document that helps outline how you would like your personal property and assets to be distributed after you pass away. It provides your executor, the person in charge of getting everyone the things you have left for them. There are some basic components and considerations to consider when considering using a will as a part of the estate planning process.

The Timing

A will does not have any effect until the testator, or the person whose assets it protects, passes away. Before a person dies, no property is transferred, and no one has any claim to the property.

The Executor

The executor is the first component of the will. This is the person the testator chooses to handle the distribution of their estate. The executor is responsible for gathering and accounting for the assets, getting them to the appropriate person or charity, and taking care of any bills or debts the estate owes. This can play a big role, so it is vital to choose a person wisely.

Some choose friends or family members, but many choose professionals who will not get involved in family dynamics. It is also important to have a backup executor if the selected person can no longer serve.

The Beneficiary

Another significant component is the beneficiary or beneficiaries. A beneficiary is a person who receives something of value from the estate after a person dies. This is often a family member of the testator, but friends and even charities can benefit from the will. A will allows you to give your things to anyone you choose. Still, it is important to have backups or alternative beneficiaries because property can be subjected to the standard probate process if the named beneficiary cannot take the item for whatever reason.

The Distributions

The main component of the will is how it will distribute assets. You can work out any general or complex plan to distribute your personal and financial assets to your beneficiaries. You can transfer assets, such as real property, in property deeds, investment accounts, or other financial holdings.

A will is also the best place to make a legal arrangement for any minor children or pets you may leave behind. This means that you can appoint guardians and set up funds to help pay for care if you cannot care for them. This allows you to be sure that your valued family members will be cared for moving forward.

Estate Tax

An important consideration with each estate planning tool is whether estate taxes will be levied against the estate when it is distributed. The federal estate tax ranges from 18% to 40% of the estate, but it only applies to estates over $13,000,000. Each state has a similar estate tax; however, many state estate taxes affect much smaller estates.

Probate Court

The final consideration is whether you would like your descendants to deal with the probate court, a court-supervised proceeding to interpret the will and settle any disputes. Most wills must go through probate, which can be expensive with court fees and slow court proceedings before everyone can receive their distributions. However, most courts require that these cases wrap up within a year.

A Note on Living Wills

When considering estate planning, you may encounter the term “living will.” While this is similar to a will, it has a different purpose. While a last will aim to disburse assets, a living will seek to outline the plans for your medical treatment and end-of-life wishes should you be unable to make decisions for yourself. It helps your loved ones decide for your care when you cannot communicate those choices. If you have specific requests for medical care, consider drafting a living will with your attorney.

The Basics of Living Trusts

A living trust is another option to transfer property and protect assets both during your life and after you pass away. A living trust is a legal relationship that will ensure your assets are disbursed as you would like, and it comes with additional benefits. By transferring assets to an account that a trustee manages, you hand over the management of the assets and ensure that the assets are being cared for and disbursed correctly without having to be involved.

It also allows you to avoid the probate process in many instances. Below, we discuss the major components of a trust and the two kinds of living trusts.

The Timing

Unlike a will, a living trust takes effect as soon as it is created rather than waiting until the grantor, the person making the trust, dies. Thus, trust is a way to create a scheme to provide your loved ones with benefits during your life and after.

The Trustee

As the trust document outlines, a trustee controls a living trust and has a fiduciary responsibility to follow the trust and control the assets. This is typically a professional company that manages the trust, but it can also be a specific person that you would like to have help you. However, it is always best to have a successor trustee to cover the responsibilities if the original trustee is unavailable.

The Beneficiaries

The beneficiaries are the people who receive benefits from applying for the living trust. The beneficiaries may be a group of people, a charity, or another organization. This allows the grantor to use their assets to make money that benefits others strategically.

Revocable Living Trust

A revocable living trust is created while the grantor is alive, allowing them to change how the trust is controlled or disbursed during their lifetime. This allows for trust to shift and change with your life as your circumstances change, whether in addition to the family or varying needs. The trust may even be entirely revoked during your lifetime.

Revocable living trusts are subject to estate tax because they are seen as a part of the estate you still have control over when you pass away.

Irrevocable Living Trust

An irrevocable trust cannot be changed once the assets are added and the trust is created. The assets held in an irrevocable trust account cannot be removed or accessed unless the grantor meets precise criteria, which are not often met.

An irrevocable living trust is not subject to estate tax because the assets are no longer under your control, meaning they are not considered a part of your estate.

A Note on Testamentary Trusts

A testamentary trust is a trust that is created through a will. The legal documents in the will include language that sets up a trust. This differs from a living trust because it does not exist until the person dies.

Picking the Best Option

Finding the right option for your estate can come down to understanding the main differences between wills and living trusts and finding ways to make the key differences work in your favor. A will and trust have unique strengths that can work in various situations. You may also utilize living trusts and wills to manage your complex estate.

Reasons to Choose a Will

While a will can subject you to probate proceedings and occasionally have less certainty, it is the only document allowing you to make arrangements for any minor children or pets you may need to make arrangements for. Unlike a living trust, your will does not take effect immediately, meaning you can make changes and control your assets for the rest of your lifetime.

Reasons to Choose a Trust

A trust is a good option if one would like to have the beneficiaries receive some benefit during a person’s lifetime. If you use a revocable trust, you may make changes while you are still alive, add other assets, or leave money to specific people at a particular time. However, unless you use irrevocable trusts and surrender your ability to make changes, the assets may still incur tax obligations. Yet, living trusts have the added benefit of avoiding probate and a court proceeding.

The Benefits of Hiring an Estate Planning Attorney

While creating a will or living trust may seem simple, certain aspects must be addressed correctly. Therefore, it is always best to consult a probate attorney to find the best options for your life and situation.

A living trust and a will can be helpful in estate planning, and an excellent attorney can help you draft the perfect trust agreement or will.

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Emily Holland
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