Most people only have a vague notion of what a will and a living trust is. Since both involve transferring or protecting assets, they’re often confused. But both of these documents serve different purposes.
What is a will?
A will essentially does four things:
- Gives instructions on how to distribute assets and property upon death
- Names beneficiaries
- Allows you to choose an executor to oversee the distribution of assets
- Allows you to choose a guardian to finish raising minor children
A will only goes into effect after you die. It covers any property in your name upon death but does not cover property held in a trust or joint tenancy.
For a will to be carried out, it must first pass through probate – the legal process in which the court ensures the will is valid; that outstanding debt, legal fees and taxes are paid; and that all assets have been appraised before being distributed.
What is a living trust?
A trust is a legal relationship in which a person or company, referred to as the trustee, holds the property or assets for the beneficiary.
A living trust enables you to manage your assets both before and after death. Similar to a will, a living trust details your desires regarding your assets, dependents and heirs. Your assets – such as investments, bank accounts, real estate, and personal property – are placed into a trust that defines how to distribute those assets upon death.
If you are serving as the trustee, it also allows you to name a successor upon your death or incapacity.
As the trustee, you remain in complete control of your assets and can move them in and out as you wish.
What’s the difference between a will & a living trust?
There are a few key differences between a will and living trust.
First, a will does not go into effect until you die while a living trust takes effect as soon as you create it.
A key advantage to a living trust is it allows you to bypass probate. Probate can be lengthy, often taking more than a year to sort out, and is sometimes a very painstaking process. Furthermore, it can be costly, especially if you have a bigger estate. Probate fees vary state to state but generally run between 5-10% of the value of your assets.
The other major advantage of a living trust is it ensures privacy. Wills are public documents, open for scrutiny and potential protest. Probate is also open to public view, which you might want to avoid if you would prefer to keep the details of your estate private.
However, living trusts are typically more expensive to set up than most wills because they require active management once created.
It’s also important to keep in mind that unless you fund the trust or place assets into it, it is useless and offers no benefit.
Which is preferable will depend on your situation, but the size of your estate is usually the biggest factor. Wealthier individuals can save their beneficiaries more money by choosing a living trust to dodge probate than those with smaller estates.
For more information about the difference between will and trusts or to create a will or trust, contact TuckerAllen.