Estate planning is one of the vital things a person can initiate to provide a safe future and financial security for their relatives and loved ones. When thinking about making an estate plan, the person needs to consider many crucial aspects to decide what is suitable for their property and assets. Therefore, an important question to navigate is which option between wills and trusts is right for you.
There is a significant difference between the two estate planning documents, and each has its fair share of advantages and drawbacks. Thus, it is imperative to make an informed decision that can benefit your family the most after you are gone.
What is a Last Will?
A last will is a written document that expresses the testator’s final wishes regarding the handling of their financial affairs, assets, and property. This includes assigning an executor, naming the beneficiaries, appointing a guardian for young children, and allocating the assets to friends, relatives, and charitable institutions.
A will becomes effective in an estate transfer and other legal matters only after the person’s death. In addition, all wills have to go through the probate process–a court process where an authorized court administrator examines the will and approves the execution of this legal document. The probate process allows the beneficiaries to receive their inheritance.
What is a Living Trust?
A living trust is another approach to estate planning that provides lifetime and after-death management of the property. Living trusts are of two types:
- Revocable living trusts: Can be altered by the person making the trust at any time.
- Irrevocable trusts: Once made, they cannot be altered.
The person creating the revocable living trust is called a grantor or primary trustee. They can transfer any of their assets and property to the trust, making it the trust property. The grantor has complete control over the assets and the property placed in the trust during their lifetime and can assign a successor trustee who will administer the trust’s assets according to the grantor’s wishes after death. A trust becomes effective as soon as it’s signed. Living trusts also name the beneficiaries to the assets set aside in the trust. Creating a living trust allows a person to avoid probate.
8 Main Differences Between Trusts and Wills
As mentioned above, there is a significant difference between living trusts and last wills. Here is a quick analysis of some of the points that may help you make a better decision about your estate planning.
1. Effective Date
A last will is effective in an estate transfer only after the decedent’s death. On the other hand, a living trust comes into force as soon as the grantor signs it.
2. Probate Process
The execution of a will requires the intervention of probate court to ensure that the decedent’s final wishes are duly carried out. The court system that mandates probate ensures that the deceased’s assets and property have been passed on to living individuals. At the same time, one can avoid probate by creating a living trust because the ownership of the property is transferred to the trust during its creation.
3. Guardianship of Minor Children
In a last will, the testator can assign a legal guardian to care for their minor children after their death, whereas guardianship cannot be assigned in a living trust.
4. Privacy Concerns
A will becomes a public record after the decedent’s death on account of the probate process. This means that anyone can go to the probate court and have access to this legal document.
On the contrary, a living trust is a private affair and can only be accessed by the successor trustee and the beneficiaries.
When it comes to the last will, minor children are legally protected from disinheritance. Spouses cannot be completely disinherited in accordance with the community property law or elective share statutes. However, you can disinherit your spouse by signing a prenuptial or postnuptial agreement and waiving your rights to each other’s property. As per the disinheritance of adult children, it needs to be explicitly stated in the will’s terms.
On the other hand, it is relatively easy to disinherit your children and spouses in the case of living trusts. You can simply include a provision in your living trust stating disinheritance of your children, spouse, or another family member.
The costs involved in making a will are reasonably low, but the actual expenses arise after the testator’s death as the probate process requires considerable time and money.
Meanwhile, setting up a living trust is much more complicated and expensive and usually requires the help of an attorney.
A will requires at least two witnesses to be present during the time of signing of the document. In contrast, the signing of a living trust does not require the presence of any witnesses, only a notary public.
8. Instructions for taxes
You can leave instructions regarding the payment and management of your taxes when preparing your last will. However, it is not advisable to do so in the case of a living trust.
How to Choose the Best Option
There are many considerations involved when choosing between wills and trusts. It mostly depends on specific individual circumstances, including your estate’s size and the need for a guardian for your minor children.
That’s why it is essential to understand the advantages and disadvantages of the two documents before making the right choice.
Advantages of Wills
The advantages of wills are:
- They are relatively easier to create.
- They can include guidelines on caring for minor children and pets by appointing guardians.
- They allow the testator to distribute their assets according to the testator’s wishes.
Disadvantages of Wills
The disadvantages are as follows:
- Wills are subject to the probate process, which can be lengthy and expensive for the deceased’s family.
- Wills may be subject to federal estate tax and income tax.
- Wills become a matter of public records after the testator’s death.
Advantages of Living Trusts
The advantages of a living trust are:
- It can contribute to avoiding probate if the trust document is created during the lifetime of the grantor.
- The privacy of the grantor’s affairs is maintained.
- It allows the grantor to leave the assets to anyone they wish to.
- The living trust documents allow a successor trustee to take over in case the grantor becomes mentally incapacitated.
Disadvantages of Living Trusts
The disadvantages of a living trust are:
- It is complicated and costly.
- It may be subject to a breach of fiduciary duty by the successor trustee because of the absence of court oversight.
- It requires active management of the estate.
- Guardians cannot be assigned for underage children.
Is it Possible to Have Both?
All individuals should create a last will, but not everyone might need a revocable or irrevocable trust. The need to create a living trust depends on the individual’s age, wealth, and possessions. While last wills and living trusts are separate legal documents of estate planning, having both of them for your estate might not be a bad option. If an individual has a considerable estate, innumerable properties, and young children, it might be advisable to have both a last will and living trust in place.
Neither will nor living trust helps you reduce estate tax. Most estates do not owe this property tax. So, it is always a good practice to assess your situation, weigh the advantages and disadvantages of both will and living trust, and then make an informed decision.
A will and trust can ultimately ensure that your assets and personal possessions are disposed of according to your discretion. It’s recommended to consider your circumstances and create a personalized estate plan, which will help your family and loved ones in the long run.