Imagine that you had to give away all of your belongings tomorrow.
Do you know how you would want to distribute them? Will everything go to your spouse, or will children, charities, or others receive something from you? Suppose that the government will levy taxes on your right to transfer your property to others. How will these taxes be paid?
If you do not have answers to these questions, you need to begin the estate planning process. You should plan for the distribution of your assets at your death and use of various instruments, such as wills and trusts, to convey these plans to your family and any others involved. Failure to do so can oftentimes diminish the value of your estate and could alter the way it will be distributed.
What Is Estate Planning?
Estate planning means many different things to many people. The difference in meanings comes from the fact that estate planning is a lifelong process that changes as our needs, family situation, financial situation, and desires change.
However, at any time, estate planning is nothing more than a game plan that encompasses both pre- and post-death goals and objectives. If you have not taken the time to establish your game plan, your state’s laws will determine one for you at your death.
Who Needs an Estate Plan?
Although the size of your estate is an important consideration, other factors can also indicate the need for and the extent of an estate plan. Some of these factors include:
- Lack of a will
- Minor children that require care
- Charitable inclinations
- Property ownership versus desired distribution
- Children from a previous marriage
The fact is that every family needs some form of an estate plan regardless of the amount of assets you own. Estate planning may include documents such as a trust, a will, power of attorney; health care power of attorney, and living will. You should also consider how you own title to your assets, and insure that all beneficiary forms for life insurance and retirement plans are complete and up to date.
How to Choose Between a Living Trust and a Will
Wills and living trusts can both be effective estate planning documents that enable you to direct the transfer of your assets after your death. But how do you know which you need? Read on for more information about how to choose between a will and a living trust.
What is a Will?
A will is a legal document that directs the disposition of your assets after your death. Having a valid will makes the probate process (the distribution of your assets after your death) go more smoothly than if you didn’t have a will. Also, in a will, you can name a guardian for your children.
What is a Living Trust?
A living trust is a legal document that becomes valid when you execute the documents and your property is transferred into it. You, as the grantor and trustee, manage the assets while you are alive and then they are passed directly to a trustee of your choice upon your death without involving probate. This is also called a revocable living trust because you as the grantor and trustee can revoke or amend your trust to reflect changes in your life and future plans.
In your trust, you name the successor trustees who will manage your trust after your death. You should still execute a will in conjunction with your living trust, under which you can name a guardian of your children.
What are the Differences Between a Will and a Living Trust?
The main difference between the two documents is that a will takes effect only after your death while a living trust becomes valid as soon as it is duly executed and assets are added—that is, during your lifetime.
Another significant difference between the two is that a living trust can make provisions for your estate in case you are incapacitated. A will can’t do this, although a power of attorney can. Living trusts, though, may be more specific and make managing the estate easier on the trustee than a power of attorney.
Moreover, a living trust can help to avoid the time and costs associated with probate, particularly since with a living trust, there is no freezing of assets so long as the trust has been funded. Another advantage to a living trust is that it remains private, while a will becomes part of the public record during the probate process. Through probate, you have to list in an inventory all of the assets you owned at the time of your death, and this information is available to anyone who wants to access it.
What Factors Should I Consider When Choosing Between a Living Trust and a Will?
Some of the most important factors to consider when deciding on whether you should establish a living trust include, but are not limited to, the following:
Your unique situation.
Everyone’s circumstances are different. You should have a professional attorney discuss with you how your circumstances will affect your estate plan.
Generally, states establish an asset value below which even wills can bypass probate, but that doesn’t mean lower valued estates couldn’t benefit from the other advantages of a living trust. Also, the types of assets you own should be considered. If you have assets that could be harmed by prolonged probate, such as a business for example, a living trust might be the better choice.
A living trust may have estate tax advantages both on the federal and state levels, but it depends not only on your state and the value of your estate, but also on the federal estate tax.
Because a living trust can hold your assets after your death, it offers a way to provide for young, special needs, or other particular beneficiaries you would rather not immediately receive their share of your estate. You may also provide for the care of pets in this way.
Likelihood of your estate being contested.
If you think there is a good chance that your estate distribution will be contested, a living trust may be more likely to withstand the challenge.
Your trust and confidence in your trustee.
With a living trust, you will normally be the initial trustee. However, you must be able to trust your named successor trustee to act according to your wishes without court intervention or monitoring, after you are gone.
Your current financial situation.
Setting up a living trust may be more expensive upfront than writing a will, but this must also be weighed against all the above factors.
Final Thoughts on a Living Trust
With a living trust, an asset doesn’t become part of the trust without you specifically transferring the asset to your trust. So you must transfer your assets into the trust to ensure that the asset doesn’t end up going through probate. It is also advisable to have a pour-over will with your living trust so that if you do die owning assets in your own name, you can “pour” those assets into the trust.