Living Trust Vs. Will: What’s the Difference and How To Choose the Right One for You

Deciding on the right estate planning tool — be it a living trust or a will — is a critical decision that requires careful thought and understanding. Both tools protect your assets and ensure they are distributed according to your wishes after your death. Each tool comes with distinctive features, benefits, and drawbacks.

Living Trust Vs. Will: A Quick Overview

A living trust, also known as an inter vivos trust, is a legal document that places your assets into a trust during your lifetime, and then transfers them to designated beneficiaries, often at your death, but also at any other time you choose. A will, on the other hand, follows a similar process but only takes effect after someone dies.

Understanding the key differences between a living trust and a will, along with their pros and cons, is essential to make an informed decision that best aligns with your personal circumstances and financial or estate planning goals.

What Is a Living Trust?

A living trust is a legal arrangement made during a person’s lifetime where an appointed “trustee” holds the assets for the benefit of the beneficiaries. Individuals who often benefit from or need a trust include those who have:

Sizable assets

Complex financial or personal circumstances

An interest in avoiding probate

Pros of a Living Trust

Avoids Probate: Assets held in a living trust do not go through probate, which can expedite the distribution process.

Privacy: Unlike a will, a living trust is not a public document, providing a higher degree of privacy.

Flexibility: You can revise or dissolve a revocable living trust during your lifetime.

Cons of a Living Trust

More Expensive Upfront: Setting up a living trust can require more time and money than writing a will.

Complex Process: Managing a living trust can be complex and often requires the help of a lawyer.

Loss of Direct Control: Transferring assets into a living trust limits your ability to manage them. The trust typically gains legal ownership and direct control over the assets.

What Are the Differences Between Trusts?

There are several different types of trusts, with each one serving different purposes depending on the individual’s needs and circumstances. Below are four common types of trusts:

Revocable Trusts: Also known as a living trust, a revocable trust can be altered, modified, or dissolved by the trust maker during their lifetime. Any assets placed in the trust avoid probate, providing for a smoother transition of assets to the beneficiaries.

Irrevocable Trusts: These trusts, once established, cannot be changed or dissolved without the consent of the beneficiaries. The assets placed in an irrevocable trust are no longer owned by the trust maker, thus offering potential tax benefits and asset protection.

Testamentary Trusts: Also called “Trust Under Will” or “Will Trust,” a testamentary trust is created as part of a will and only goes into effect upon the death of the trust maker. Unlike a living trust, a testamentary trust does not avoid probate. Assets in a testamentary trust are transferred to the trust only after going through the probate process, and they are subject to oversight by the probate court. 

Charitable Trusts: These trusts are set up to benefit a particular charity or the public. In most cases, they provide an income stream to the chosen charity during the trust maker’s lifetime, with the remaining assets going to the beneficiaries upon the trust maker’s death.

What Is a Will?

A will, or a “last will and testament,” is a legal document that expresses a person’s wishes as to how their property should be distributed after their death. It names a person to manage the estate until its final distribution. 

It’s important to note the difference between a regular will and a living will.

A regular will goes into effect only after you die — with no exceptions. On the other hand, a living will is a legal document that specifies what actions should be taken in case you’re unable to make decisions due to illness or incapacity.

Like trusts and any other legal tool, a will also has both advantages and disadvantages.

Pros of a Will

Control Over Property Distribution: A will allows you to dictate how your assets will be distributed after your death.

Appointment of Guardians: You can name a guardian for your minor children through a will.

Selection of an Executor: A will lets you choose an individual to manage your estate after your death.

Cons of a Will

Probate Process: The execution of a will is through probate court, which can be a lengthy and costly process.

Public Record: Once a will goes through probate, it becomes a public record, compromising the privacy of the deceased and the beneficiaries.

Irrevocable After Death: Changes cannot be made to a will once the testator has died.

Who Needs a Last Will and Testament?

Essentially, every adult should consider making a last will and testament. Regardless of the size of your estate, having a will in place can provide peace of mind and prevent potential conflicts after your death.

If you have specific desires about how you want your assets distributed, a will is the best way to ensure those wishes are honored.

This is particularly crucial for people with children, as a will can specify who you want to act as their guardian upon your death before they reach legal adulthood. A will is also often necessary for same-sex couples, especially in states where laws may not be in favor of or recognize their relationship status.

Living Trust Vs. Will: How They Differ

Living trusts and wills serve different purposes, and the right option for you depends on your individual circumstances. Below is a quick comparison.

A Living Trust:

Allows for immediate transfer of assets after death, avoiding probate

Keeps the terms of your estate private

Can be more complex and expensive to set up

Offers potential tax benefits depending on the size and complexity of the estate

A Will:

Becomes effective only after your death

Must go through probate

Is a public document

Usually simpler and less expensive to create than a living trust

What Can and Cannot Be Placed in a Trust?

In a living trust, you can include most of your assets, including:

Real estate properties

Bank accounts

Stocks and bonds

Personal property such as jewelry, artwork, and vehicles

However, there are certain types of assets you cannot place in a trust. These include:

Retirement accounts such as IRAs or 401(k)s, as they are subject to specific tax rules

Life insurance policies, although you can usually name your trust as a beneficiary

Certain types of savings accounts like Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs)

Remember, each person’s situation is unique and laws can vary by state, so it’s advisable to consult with a legal or financial advisor when setting up a trust.

What Can and Cannot Be Included in a Will?

A will allows you to specify how your property and assets should be distributed after your death. The following items can typically be included in your will:

Real estate

Personal property

Bank accounts

Stocks and bonds

However, some things should not or cannot be included in your will:

Property owned in joint tenancy cannot be willed to someone other than the joint tenant

Life insurance proceeds, since these are directly paid to the beneficiary named in the policy

Any retirement plans, including 401(k)s, IRAs, and other types since they have designated beneficiaries

Any property held in a living trust

As always, each person’s circumstance is unique, and laws can vary by state. Therefore, it’s advisable to consult with a legal or financial advisor when creating a will.

Advantages of a Living Trust Vs. Will

While both living trusts and wills have their merits, several distinct advantages make living trusts a preferred choice for many:

Avoidance of Probate: The most significant advantage of a living trust is that it avoids probate, the legal process of validating a will. Probate can be time-consuming and expensive, and a living trust bypasses this process entirely, allowing for an immediate transfer of assets upon the grantor’s death.

Privacy: Unlike a will, which becomes a public document once it enters the probate process, a living trust remains private. The information about your assets and to whom they are distributed stays confidential.

Planning for Incapacity: A living trust allows you to plan for potential incapacity. If you become unable to manage your affairs, your appointed trustee can step in and manage your trust’s assets on your behalf.

Flexibility: Living trusts can be revised or revoked entirely during your lifetime, giving you the flexibility to change your plans as your circumstances evolve.

Will Vs. Living Trust: What’s Best for You

The decision between a will and a living trust depends on an individual’s unique circumstances and preferences. Both options offer distinct advantages and can safeguard your assets, ensuring they are distributed per your wishes.

While wills are often seen as simpler and more affordable, living trusts offer increased privacy and can potentially save time and expenses associated with probate. The choice between a living trust and a will depends on your specific needs and circumstances, and it’s advisable to consult with an estate planning attorney to make an informed decision.

More importantly, take note that estate planning is not just for the wealthy or elderly — it’s a prudent step for anyone who wants to secure their financial future and bring peace of mind to themselves and their loved ones.

Cathy Tabor

Live your best life now. I help you create your happily ever after through estate planning for you, your family, your pets, and your assets.

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