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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.
Pros and cons of a will
A will has both pros and cons.
Let’s start with the pros:
- They’re typically less expensive and easier to create than a trust
- It's not necessary to retitle any of your assets
- It ensures court supervision of your estate, helping to ensure your assets are distributed as you wish
And now for the cons:
- Assets have to pass through probate, and you may consider court supervision of your estate to be a disadvantage because it may cost more and is more time-consuming
- The court documents are public records, so it's impossible to be private about the distribution of your estate
Pros and cons of a living trust
A living trust also has some pros and cons.
First, the pros:
- A living trust makes it possible to pass your assets and property to your beneficiaries without going through probate, which speeds up the process
- It allows for a private transfer of wealth
- If you have property in more than one state, your assets can pass through the trust without additional probate proceedings
Here are the cons:
- A living trust is more complex and typically more costly to set up, and you must retitle your assets in the name of the trust, which is also time-consuming
- It doesn’t offer any estate tax benefits or special asset protection3
Is a will or living trust better for you?
When deciding whether or not to use a living trust, it's important that your estate plan meets the unique needs of you and your family members. There may be instances when it makes sense to have both a will and a living trust, or you may decide that just having a will works for your estate plan. Because this is an important decision, it makes sense to work with a professional who can help you decide which option is best suited to your needs. You can also learn more about writing a will or setting up a trust.
Determining how and to whom your property and assets will be distributed when you pass is an important decision — and one that requires a good understanding of the choices. If it seems complicated or you simply need help weighing your options, consider working with a financial professional who can help you organize and manage your assets and explain how those assets will pass at your death.
The general information presented here is for educational purposes only and is not intended to be, nor should it be, treated as tax, legal, accounting or other professional advice. Neither Nationwide nor its representatives give legal or tax advice. Consult with your attorney or tax advisor for answers to specific questions.
Insurance terms, definitions and explanations are intended for informational purposes only and do not in any way replace or modify the definitions and information contained in individual insurance contracts, policies or declarations pages, which are controlling. Such terms and availability may vary by state, and exclusions may apply. Discounts may not be applied to all policy coverages.