Though it might not be your favorite topic, creating a will or a living trust is important for determining what will happen to your assets if you pass away.
A will is an indispensable estate planning document, but you may also want to consider adding a living trust to your estate plan. Both are legally enforceable documents that designate how you want your assets to be distributed. Still, there are key differences between a will and a living trust to be aware of as you decide which document may be right for you.
What is a will?
A will, also called a testamentary will or last will and testament, is a legal document that declares how and to whom you want your assets distributed when you pass away. In it, you name an executor to oversee the distribution of your assets, and you can also appoint guardians for minor children, pets and dependents. Without it, the state in which you live decides how to distribute your assets based on laws known as intestacy laws. A will is considered revocable, which means you can amend it during your lifetime.
Any assets that pass as stated in your will must go through probate, which is a legal process for settling an estate. The probate process varies from state to state, and because probate is a public record, anyone can see how your estate is distributed.1
What is a living trust?
A living trust, which creates a fiduciary relationship between a trustee and the trust beneficiaries, allows the trustee to hold property or assets on behalf of the beneficiaries. Trusts can be arranged many different ways and can specify how and when assets pass to beneficiaries. Assets held in trusts avoid the probate process; property and assets can be immediately passed to the designated beneficiaries. With any trust, it's important to identify the trustor, trustee, a successor trustee and the trust beneficiaries.
Trusts can be revocable or irrevocable. A living trust is typically revocable, which means that the trustor (the creator) reserves the right to revoke or to amend the trust. A living trust typically becomes irrevocable when the trustor passes.
What is particularly unique with the living trust is that the trustor is also typically the trustee and the only trust beneficiary during his/her lifetime. This allows the creator of the trust to remain in complete control of any assets re-titled in the name of the trust. Although assets in the living trust avoid probate at the trustor’s death and are a nonpublic transfer, they’re still exposed to creditors, as well as estate taxes, because of this retained control.
Finally, a process referred to as “funding the trust” should take place. That’s when the trustor retitles certain assets in the name of the living trust. By moving assets that were held outside of the trust into the trust, those assets become owned by the trust and will be subject to the directives in the trust document.