Though it’s uncomfortable to think about death, it’s crucial to take certain steps to protect your assets before that time comes. Living trusts and wills are two estate planning options designed specifically to help you prepare for the inevitable. While one focuses largely on the management of your assets during life and after death, the other focuses solely on the distribution of your assets after you’ve passed away. You can also speak with a financial advisorabout your estate plan.
What Is a Living Trust?
A living trust is a legal entity that allows an individual to place his or her assets under the management of a trustee. The trust’s ownership can either lie under the management of the individual or someone of his or her choosing. In other words, the trustee is either someone the trust maker appoints or the actual trust maker. It’s important to note that the trustee typically has a fiduciary duty to protect the trust maker’s assets. In addition, the trust can also have multiple named beneficiaries. These are people whom the trust maker gives access to their assets.
Now that we understand what living trusts are, let’s explore the two different types. When opening a living trust, you can decide whether you want it to be revocable or irrevocable. A revocable living trust allows you to retain full control over and cancel the trust whenever you choose. The irrevocable living trust, on the other hand, blocks you from cancelling it.
While largely opened for during an individual’s lifetime, a living trust can also continue to be enforceable after its maker’s death. However, it won’t continue if the trust maker decides to have it terminated at a specific date. Furthermore, if for some reason you’re unable to maintain the trust, you’ll have the option of choosing a successor trustee. A successor trustee manages the trust in your place. Successor trustees are also responsible for distributing the trust’s funds to your beneficiaries, following your death. Therefore, the fate of your trust will ultimately depend on your wishes.
But what assets can you transfer into a trust? You can make instructions about the succession of real estate, bank accounts, stocks and even life insurance under a living trust. Some assets, however, cannot be transferred to a trust, and others may require you to issue a new title under the trust’s name.
The method for setting up a living trusts depends on what state you do it in. The process in Iowa won’t be the same as in Ohio, Georgia or New Jersey.
What Is a Last Will?
A last will gives you the power to decide what happens to your estate and assets following your death. It’s a legal document that details your last wishes, particularly those concerning the distribution of your assets and the care of any minors. What you include in your last will can vary widely, but you generally will include at least the following information:
- An executor, who is in charge of shepherding your estate through the probate process and managing your estate according to the terms of the will.
- Beneficiaries, the person or people who will inherit your property or other assets.
- Information about your assets, including bank account information, location of assets and any other pertinent information. This is to help your executor streamline the process of determining how much your estate is worth.
- Designated guardians for your children, if they are minors. This can be part of a joint will between two spouses.
A will does not immediately go into effect when you pass away. Rather, it must first pass through a legal process known as probate.
In addition, there are living trusts; there are last wills; and there are living wills. However, despite sounding similar, a living will has little to do with living trusts or wills.
A living will is a legal agreement that allows you to describe the medical procedures you’d like doctors to take while you’re in critical health. It acts to ensure that your wishes will be met on the occasion where you become incapacitated or medically unable to voice and make decisions for yourself.
Living wills essentially give you the power to control which procedures you’ll undergo beforehand. They also determine whether you want resuscitation, tube feeding or life support procedures. Additionally, living wills will permit you to specify matters like guardianship for your children, organ donation wishes and personal hygiene requests.
Living Trust vs. Will: Key Differences
While both wills and living trusts establish procedures to manage and eventually distribute your assets to beneficiaries after your death. However, the two estate planning options diverge in their execution.
A living trust enables you to place certain assets under the management of a trustee. The assets in the trust are protected during the owner’s lifetime and then transferred to their beneficiaries if that’s what they desire. A will, however, dictates in advance how you would like your executor to handle and distribute your estate after you pass away.
With a living trust, you will be able to witness how your trustee manages your assets while you’re still alive. With a will, you will be gone before your executor’s duties even begin.
Additionally, opting for a living trust should allow your descendants to avoid the probate process. The assets in your estate should be disbursed more or less immediately upon your death (or on a fixed date, such as a child’s 18th birthday). By contrast, a will must pass through the probate process and could involve a contestation.
Living Trust vs. Will: Which Is Right for You?
When it comes to living trusts, you ultimately determine whether you need extra protection for your assets. Living trusts provide an extra layer of security for assets like real estate, bank accounts and mutual funds, so it’d be best to measure whether or not your assets would benefit from such a fund.
Furthermore, a living trust can be a safety net in situations of illness and incapacitation. If you aren’t able to manage your trust’s money, your trustee will be able to oversee it in your absence. This will prevent the courts from hiring someone to manage your estate. Living trusts also allow you to leave your assets to your children if you so desire.
A last will is a crucial estate planning document for just about anyone. Even if your will simply instructs the executor to adhere to the terms of your living trust, it’s helpful to create. If you don’t have a will in place, your beneficiaries could wind up having to deal with a longer, more complex probate process. This will not only delay the distribution of your assets, but it will make it more difficult for your heirs to get closure following your passing.
In the living trust vs. will decision, it’s important to recognize both are helpful options. Indeed, you may choose to have both. You sign the two estate planning options during your lifetime. In addition, both serve to protect you and your loved ones after your death. If you’d like extra security for certain assets, or you don’t want your beneficiaries to receive certain assets before they reach a certain age, a living trust may be a solid choice for you. If you want a plan in place to ease the probate process, a last will can do it.
Managing Your Money in Your Golden Years
- Whether you’re trying to grow your nest egg or build an estate plan that protects your family, a financial advisor can help with your plans.Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Want to pass along wealth to your loved ones? First you have to grow that wealth and make sure it’s enough to last through your own retirement. Use our retirement calculator to see if you’re on pace for a secure retirement.
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A will typically goes into probate after the testator dies, while a trust does not. A will is a set of instructions for after death, and a living trust is an account that is funded by a person's assets while they're alive.What is the downside of a living trust? ›
One of the primary drawbacks to using a trust is the cost necessary to establish it. This most often requires legal assistance. While some individuals may believe that they do not need a will if they have a trust, this is sometimes not the case.What are the pros and cons of a trust vs will? ›
What are the pros and cons of wills and trusts? Wills are easier to create, less expensive, and more flexible, but they need to go through probate and become public records. On the other hand, trusts are more complicated and expensive to set up, but they don't require probate and offer privacy and asset management.What assets should not be in a trust? ›
- Retirement assets. While you can transfer ownership of your retirement accounts into your trust, estate planning experts usually don't recommend it. ...
- Health savings accounts (HSAs) ...
- Assets held in other countries. ...
- Vehicles. ...
Using an irrevocable trust allows you to minimize estate tax, protect assets from creditors and provide for family members who are under 18 years old, financially dependent, or who may have special needs.
A living trust, also known as a revocable living trust or a revocable trust, is a legal document that establishes a trust for any assets you wish to transfer into it. The main purpose of a living trust is to oversee the transfer of your assets after your death.Why do rich people put their homes in a trust? ›
One of the main reasons you may place your home in a trust is so your family can avoid a lengthy and expensive probate process after you die.Why do people do wills instead of trusts? ›
Trusts provide for the management and distribution of your assets during lifetime and after death. A Will, on the other hand, allows you to do things like name guardians for your children, appoint an executor for your estate, and declare your final wishes.What is the downside to a will? ›
A will only controls the assets that are titled in testator's (decedent) name. It does not control assets that are titled in joint ownership and go to testator's spouse or another joint owner when he/she dies.
Do I Need a Living Trust? While there's not a one-size-fits-all answer, the vast majority of people can get by without using a living trust. Dave Ramsey says, “A simple will is perfect for 95% of the population.” In other words, unless you have a really big estate, a simple will works just fine.
To make sure your Beneficiaries can easily access your accounts and receive their inheritance, protect your assets by putting them in a Trust. A Trust-Based Estate Plan is the most secure way to make your last wishes known while protecting your assets and loved ones.What Cannot be held in trust? ›
The assets you cannot put into a trust include the following: Medical savings accounts (MSAs) Health savings accounts (HSAs) Retirement assets: 403(b)s, 401(k)s, IRAs.What is the best trust to protect assets? ›
Most trusts can be irrevocable. An irrevocable trust offers your assets the most protection from creditors and lawsuits. Assets in an irrevocable trust aren't considered personal property. This means they're not included when the IRS values your estate to determine if taxes are owed.
A trust helps an estate avoid taxes and probate. It can protect assets from creditors and dictate the terms of inheritance for beneficiaries. The disadvantages of trusts are that they require time and money to create, and they cannot be easily revoked.What are the disadvantages of putting your house in a revocable trust? ›
Some of the Cons of a Revocable Trust
Shifting assets into a revocable trust won't save income or estate taxes. No asset protection. Although assets held in an irrevocable trust are generally beyond the reach of creditors, that's not true with a revocable trust.
A revocable trust and living trust are separate terms that describe the same thing: a trust in which the terms can be changed at any time. An irrevocable trust describes a trust that cannot be modified after it is created without the beneficiaries' consent.