A will is a legal document that tells the world who gets your assets and personal property after you die. A will is filed in probate court, is public record (available to creditors!), transferring assets and property is a slow process, (18 months average) and supervised by a judge. A will names an executor, a person to oversee and distribute your estate after you die.
A living trust holds legal title to your assets. The trust itself, listing all your assets and estate information, is not filed with a court, it is not public record. By having a living trust, you streamline the process and avoid probate costs. A living trust also acts to protect an adult’s separate inherited property from a spouses’ creditors. A trust can put conditions on how your assets are distributed after you die in order to reduce gift and estate taxes.
A Will
- A will is public record and must be filed as a public record
- A will names an executor to distribute assets after you die
- Must go through Probate court process (18 months average)
- Can name a guardian for minor children
- Can disinherit specific people (like spouse or adult children)
- Probate can cost between 5% – 7% of your estate value
- Full transfer of assets takes place through probate
- No protection from creditors and lawsuits
- Everyone needs a will, regardless of the size of their estate
A Trust
- A trust is not public record, it remains private and is not filed with the probate court
- A trust lets you put conditions on how and when your assets are distributed after you die
- You are in control of all the assets within the living trust and can revoke it at any time
- Cannot name a guardian for minor children in a living trust
- Cannot disinherit specific people (like spouse or adult children) in a living trust
- A trust protects your assets from creditors and lawsuits
- A trust can reduce estate and gift taxes through transfer planning
- Can name a successor trustee to manage the trust assets if you are unable to do so
- Not everyone needs a living trust if they have a smaller estate or will leave all to their spouse
Making a will is especially important for people with young children who need to appoint a guardian for minor children. After a marriage, a new baby, a divorce or any other major life change, make sure you change your will. In fact, it’s a good idea to review your estate plan and at the same time, review your beneficiary designations for your 401(k), IRA, Pension, and life insurance. These accounts will transfer automatically to the named beneficiary, regardless of what your will states.
These are some of the things that a valid will can control:
- Division of your assets. You can divide your assets any way you choose, and you can change your will at any time. Many assets will transfer automatically (joint accounts, 401k plans).
- Care for your pet. You can name someone to take custody of your pets, or different people for each pet. Make sure you include provision for unspecified (unnamed) pets in case you adopt more in the future. Also, leave some money for the pets’ future vet bills and expenses.
- Appointing an executor of your estate. The executor closes your accounts, notifies government agencies, and pays the estate’s debts and taxes. They should follow your directions on who inherits your assets and arranges for transfer of property to your beneficiaries.
- Appointing a guardian for your children. You can name a legal guardian or an estate guardian for your children. Guardians are always established when someone dies with children and no other parent is alive. A living trust cannot appoint a guardian.
- Disinheriting specific relatives. You can specify in your will if you want to disinherit anyone. Family members can still challenge a will that explicitly disinherits them in probate court. Disgruntled spouses and adult children can sue to fight for what they perceive as unfair disinheritance. Only a will can disinherit a current spouse or an adult child. A living trust cannot.
- Funeral wishes. Funeral services are an industry like any other, and they know how to frame their questions in a way that pushes customers to spend more. Rather than leaving this burden to a grieving spouse who may be taken advantage of, you can write out detailed (or simple) instructions. This would include the kind of service you want, people who should be notified, and burial or cremation instructions. You can even set aside a specific budget for it in your will and instruct your loved ones to not spend any more than that.
The problem with wills is in the probate process. It’s expensive, it’s public and it’s time-consuming. When you die, legal ownership of your property passes to your ‘estate’, which is to be distributed by your executor. Your will becomes public record, and a judge in probate court oversees the distribution of assets. A probate judge will also rule on any disagreement between the beneficiaries. They also rule on challenges from those not named in your will who feel they’re entitled to a piece of (your) pie.
The probate process can take up to 18 months. Your will and any disputes about your estate are public record. For more privacy, you can use a living trust. If
A Living Trust is a will’s fancier cousin.
A living trust streamlines your estate and help your family avoid the costs of probate. As the name suggests, you can change, update or entirely revoke a living trust at any time. You basically name yourself as the trustee while you’re alive, and the successor trustee only steps in if you become disabled or die.
A revocable living trust moves your assets into a trust so they can go directly to your heirs upon your death. This makes the process move much faster. Instead of months, or even years, the distribution of your estate can take place in just weeks.
Your family doesn’t have to wait, and your estate information doesn’t have to go on public record. Your trustee can transfer real estate and distribute your assets privately. Beyond privacy, living trusts are harder to challenge legally. The complex laws governing trusts make them harder to challenge than a will. This reduces the chance of non-heirs coming forward to try and claim money or property. A will must be filed with the probate court. A living trust does not. A living trust doesn’t require oversight from a court or a probate judge. Your trustee can simply transfer ownership directly from your trust to your heirs.
For a trust to work, you must transfer legal ownership of your assets into the name of your living trust – while you’re still alive. You will ideally change the name on all major financial accounts and assets. Remember, you are still the person controlling the trust! You aren’t giving away anything now.
For example, the deed to your house probably lists the owner as “Pat and Chris Smith, a married couple” this is a standard way for people to hold legal title. Instead, the deed will list “The Pat and Chris Smith Living Trust” as the property owner. If you have to refinance the property, lenders will require you to take the property out of your living trust. This means retitling the property back to “Pat and Chris Smith.” A living trust also protects separate property, even for a married person. By putting a home in a trust, protects the inherited property from creditors in case of a divorce or a spouse’s debts.
Trusts also work well to create a long term financial plan. For example, imagine you want your child to benefit from and eventually inherit your money. If they inherit a lump sum on their 18th birthday, they are unlikely to manage it wisely. To accomplish this, you create a trust that allows them to access money for educational expenses when they turn 18, but not the entire inheritance in cash.
You can also set up provisions for how the remaining estate is transferred. You can provide for a surviving spouse, with the trust to be distributed to children upon the spouse’s death. They could receive it all when they turn 30, or you can stagger the disbursements, or even go into a retirement account to keep them comfortable in their older years.