Understanding the Difference Between Wills and Living Trusts
Wills and Living TrustsWills and living trusts perform almost the same function: specifying who gets each of your assets when you die. Just about everyone will benefit by having one or the other. If you have neither when you die, your assets will be distributed to your family according to the laws of the state you live in, which quite possibly won't be the way you want them divided up. That distribution would be performed without regard to each beneficiary's financial situation or ability to manage the assets. Furthermore, if the state can't find your relatives, the assets could end up going straight to the government.
The most important difference is that property bequeathed through a will must go through a process called probate (unless the value of the assets is very small), while property bequeathed through a living will bypasses this step. In probate, the government makes sure that your will is authentic and valid, that your debts, taxes, and legal fees are paid, and that your assets are cataloged and appraised, before the assets are distributed. This process often takes more than a year.
By avoiding probate, a living trust gets your assets distributed significantly more quickly than a will does. It also offers a higher level of confidentiality, as probate proceedings are a matter of public record. Additionally, trusts are usually harder to contest than wills.
On the downside, a living trust takes longer to put together than a will, and requires more ongoing maintenance. Although both a will and a living trust can be modified or revoked at any time before you die, such changes are slightly more time-consuming for a living trust. Additionally, assets that you want to move to a living trust, such as real estate and bank or brokerage accounts, have to be retitled.
So which is better, a will or a living trust? That depends on your situation. The biggest factor is the size of the estate. Very wealthy individuals can save their beneficiaries more by opting for a living trust to avoid probate than those with smaller estates could. A secondary factor is the extra ongoing work that a living trust requires. This is why experts say that those under age 60 and in good health are probably fine with a will. One other factor is the type of assets in the estate. If you own a small business that you don't want tied up during probate you might prefer to have a living trust.
Another option is to have both a living trust and a will. Some people specify all of the important assets in the living trust, and use a will to cover everything else. If the value of the items in the will are below a specific amount, probate is not necessary. This amount varies from state to state, but is generally very low. Another option is to have a "pour over will", which specifies that any assets not in the trust at the time of death go into the trust. (These assets would, however, still be subject to probate.) Finally, as we mentioned, you will want a will if you have children, so you can specify a legal guardian and change it easily later if circumstances warrant.
More About WillsIf you decide to set up a will, here are a few important things to keep in mind.
Be explicit in your wishes. Most states don't let the executor guess what you wanted if it's not specified, so be sure to spell it out in the will.
In the previous section we emphasized that probate can be avoided by choosing a living trust rather than a will. If you do opt for a will, you might still be able to partially avoid probate. One way is by jointly owning property with your spouse (or children). Another way is to have a life insurance policy payable to a specific person, rather than to your estate.
Assets that you bequeath to your spouse are tax-free.
The choice of an executor to carry out your instructions is very important. Be sure to select someone you can trust. Most people choose their spouse or a close friend or relative. For complex estates, some people choose an attorney to be their executor.
Be sure that your will is in a safe place. Tell your executor, spouse and other important beneficiaries where it is. Have a copy in another safe place, just in case. If it can't be found, it will be the same as if you didn't have a will at all.
Although you are able to specify the distribution of nearly all of your assets, there are a few exceptions: life insurance, annuities, and retirement plans such as pensions, IRAs and (k).
Once you have your will set up, it's important to talk to your beneficiaries about it. While the conversation might be a little uncomfortable, it will benefit them in the long run.
More About Living TrustsIf you decide to set up a living trust, here are a few important things to keep in mind.
With a living trust, some or all of your assets are transferred to the trust. The management of the trust is handled by a trustee that you designate. If you designate yourself as trustee (as is typically done), then you continue to own the assets (and pay any appropriate taxes on them) until you die. This is why a living trust is sometimes called a revocable trust, or an inter vivos (Latin for "between the living") trust. You also designate a successor to act as trustee when you die.
Setting up a living trust is a two-step process: filling out the necessary paperwork, and then transferring ownership of the assets to the trust.
Spouses are usually equal trustees, meaning that the surviving spouse retains his/her trustee status after the first spouse dies. Some married couples set up a single joint living trust to cover them both, but this limits the ability of the surviving spouse to make changes after the first spouse dies.
The choice of a successor trustee to carry out your instructions when you die is very important, even more important than choosing an executor of a will, because unlike an executor, the trustee will be managing your assets without court oversight. Most people choose their spouse or a trusted friend or relative.
Since a living trust doesn't require that your creditors be notified (as a will does), a creditor could make a claim against the beneficiaries of the trust well after you die.
Be sure that your living trust is in a safe place. Tell your executor, spouse and other important beneficiaries where it is. Have a copy in another safe place, just in case. If it can't be found, it will be the same as if you didn't have it at all.
Although you are able to specify the distribution of nearly all of your assets, there are a few exceptions: life insurance, annuities, and retirement plans such as pensions, IRAs and 401(k)s.
Once you have your living trust set up, it's important to talk to your beneficiaries about it. While the conversation might be a little uncomfortable, it will benefit them in the long run.
By InvestorGuide Staff
Posted in ...Personal Finance