When you spend most of your time working hard for your money its only natural that you want some control over what happens to your assets after you die. Even if you are a person with modest means, you have an estate and several strategies to choose form to ensure your assets are distributed according to your wishes and in a timely fashion: your estate plan. The right strategy for you depends on your individual circumstances. A living trust, for some people, can be a useful and practical tool. For others, it may be a waste of time and money. What is a living trust and how does it differ from a will?
What is a will?
A will is a written document that is signed and witnesses that indicates how your property will be distributed at the time of your death. It is revocable and subject to amendment at any time during your lifetime. It also allows you to appoint a guardian for your minor children.
What is a living trust?
A living trust provides lifetime and after-death property management. If you are serving as your own trustee, the trust instrument will provide for a successor upon your death or incapacity. Court intervention is not required. Living trusts are also used to manage property. If a person becomes disabled by accident or illness, the successor trustee can manage the trust property. As a result, the expense, publicity and inconvenience of court-supervised distribution of your estate can be avoided.
If a living trust is properly written and funded, you can:
- Avoid probate on your assets
- Plan for the possibility of your own incapacity
- Control what happens to your property after you are gone
- Use it for any size estate
- Prevent your financial affairs from becoming a matter of public record.
However, there are some drawbacks to a living trust. Living trusts tend to be more expensive to set up than a typical will because it must be actively managed after it is created. Also, a living trust is useless unless it is funded. It can only control those assets that have been placed into it. Upon your death, if you your assets have not been transferred or funded, the trust will be of no benefit as your estate will still be subject to probate and there may be significant estate tax issues.
Will vs. Living Trust Considerations
There are many positive reasons to establish a trust but do not overlook the fact that it will involve more upfront effort and expense. To determine if you should make the extra effort and invest in the expense of a trust, answer these questions.
Is informal probate an available option? Most states will have an expedited or simplified form of probate for estates under a certain dollar threshold (amount varies by state). If your estate could pass under an expedited form of probate, or if you have lived in a state where probate is not a complex or burdensome process, a will could be appropriate.
Do you have minor children? A trust will allow you to establish provisions specifying when a child will be entitled to any assets held in trust.
Do you have children, grandchildren, or other dependents with special needs? In those instances, the access or control those heirs have over their inherited property may need to be limited. With a standard will your property can be passed on to those heirs, but a will alone does not allow you to exercise much control over their use of property.
Will your estate be subject to estate taxes? If the value of your estate exceeds the current estate tax threshold, you may want to consider setting up a trust with tax planning provision. The estate tax threshold frequently changes. Check in with the IRS to determine whether estate tax is a concern for you.
Will you actively manage your estate plan? If you are not managing your estate plan, a living trust may not be a suitable solution. A trust will only be beneficial if assets are transferred into it.
A living trust and a will, will accomplish similar objectives. A trust allows you to realize other objectives that a will cannot. Those advantages don’t come without a price. Deciding whether a living trust or will is better for you depends on if the additional advantages are worth the cost. When deciding which to choose, remember that what is right for one person may not be right for everyone. Your estate plan should be prepared in a way that best meets the needs of you and your family.