Estate planning is something you may not be ready to think about just yet, but it shouldn't be put off. One key decision to consider is whether you'll need a will, a living trust, or both.
Understanding how they compare can help you decide if it makes sense to have both a will and a trust.
What is a will?
A will, also referred to as a last will and testament, is a written document that's used to distribute property following someone's death. When someone writes a will, it's revocable and subject to amendment at any time during that person's lifetime.
The main purpose of a will is to allow you to specify how estate assets will be divided among your heirs or anyone else you'd like to leave money or property to after you're gone. A will also allows you to name a legal guardian for minor children.
State laws determine what constitutes a legally valid will. Generally, a will is considered valid if it's:
- Written and signed by an adult who is of sound mind
- Witnessed by two or more adults who are also of sound mind
- Not created under duress or as a result of fraud
Some state laws permit oral wills or video wills, while others only accept a written legal document as valid. Depending on where you live,a handwritten will may be allowed. States may require wills to be witnessed and/or notarized before they're considered valid.
What's the purpose of writing a will? A will puts you in control of what happens to your assets when you're gone. When someone dies without a will,state intestacy laws determine how assets are distributed.
A surviving spouse is typically first in line. If there's no surviving spouse, then your children would be next, followed by your parents, siblings, and other family members.
What is a living will?
Living willsare advance directives that allow you to leave instructions for medical care in situations where you're terminally ill. For example, you might include a "do not resuscitate" order in your living will or specify which kinds of procedures you don't want to be subjected to. Living wills ensure your end-of-life wishes are upheld by your doctors and loved ones.
What is a trust?
A trust is a legal arrangement in which someone, known as the grantor, transfers control of estate assets to the care of another individual or entity, known as a trustee. Grantors and trustees have a fiduciary relationship, meaning the trustee is obligated to manage trust assets in the best interests of the trust's beneficiaries.
A trust is created first on paper using a legal document,then "funded," which simply means transferring property or other assets to the control of the trustee. For example, if you plan to transfer real estate to the trust, you'd need to execute new property deeds naming the trust as the owner.
What assets can be held in a trust?
You might choose to place all of your assets in a trust or just some of them. Assets that you might transfer to a trust include real estate, bank accounts, investment accounts, individual stocks and bonds, artwork, antiques, and other assets of value. Intellectual property, such as copyrights, may also be transferred to a trust.
Assets that you would generally not place in a trust include ones that already have a named beneficiary. That means things like a 401(k) plan, Individual Retirement Accounts (IRAs), or Health Savings Accounts (HSAs). Whether you can remove assets from a trust after the transfer of ownership depends on the type of trust you've created.
There are four major types of trusts:
- Living trusts
- Testamentary trusts
- Revocable trusts
- Irrevocable trusts
Living trusts take effect as soon as they're created, while testamentary trusts only take effect upon the trust-maker's death. A revocable trust can be changed at any time during the grantor's lifetime. Upon that person's death, the trust becomes irrevocable. Irrevocable trusts are permanent, meaning no further changes are allowed.
What is a living trust?
A living trust is a type of revocable trust used in estate planning that allows you to manage assets during your lifetime and beyond.
When you establish a living trust, you can act as your own trustee or name someone else to assume that role. If you choose to serve as trustee, you can specify in the trust document who should succeed you if you pass away or become incapacitated.
Living trusts can meet a variety of needs within an estate plan. For instance, they allow you to:
- Specify what terms, if any,designated beneficiaries must meetin order to receive their inheritance
- Preserve assets forthe care of minor children or adult childrenwith special needs
- Give directions for the management of your assets if you're unable to oversee them yourself because you've become permanently incapacitated by an illness, injury, or disability
- Create a legacy of giving by naming one or more charities or non-profits as beneficiaries to a charitable remainder trust
Trusts can also allow heirs to avoid probate, a legal process that can be time-consuming and costly. Probate is a court-supervised proceeding in which a deceased person's estate assets are inventoried and liquidated to pay any outstanding debts, with any remaining assets distributed to their heirs.
When properly funded, the trust propertyis not subject to probate. Avoiding probate court can save money on legal and court fees, keep the deceased person's estate inventory out of the public record, and accelerate the time frame in which beneficiaries are able to access their inheritance.
Key differences between wills and trusts
Wills and trusts differ in several respects with regard to how they're created and what they're meant to be used for within an estate plan. Comparing them side-by-side can make it easier to understand what role each one is designed to play in estate planning.
In terms of disadvantages, wills can be challenged after a person's death, which can add a wrinkle to the disposition of their estate. Trusts, meanwhile, can be costly to set up and maintain for people with complex estates. A revocable trust wouldn't offer any protection against creditor lawsuits either, as the assets in the trust technically still belong to you.
The role of the probate court in estate planning
When someone dies, what happens next depends on whether they have a will, trust, or both in place.
If they have a will and they've named an executor, that individual can then submit an application to the probate court to start the probate process. An executor is someone appointed by the testator or willmaker to enforce the terms of the will. If there is no executor named in the will or no will at all, then anyone can petition the probate court to be appointed to the role.
Once probate is underway,the executor has certain dutiesthey're responsible for carrying out. Those include inventorying all of the deceased person's estate assets, notifying creditors of their death, liquidating assets if necessary to pay outstanding debts, and paying estate taxes or other required taxes. They also distribute assets to designated beneficiaries or heirs. State laws can permit executors to collect a fee from the estate for handling those duties.
The amount of time probate takes to complete depends on the estate in question. A large or complex estate can take longer to finalize, and there can also be delays if one or more of the deceased person's family members decide to challenge the terms of the will. The probate court would need to hold a hearing to determine whether those challenges are valid.
Transferring assets to a trust, meanwhile, allows heirs to avoid probate and its associated drawbacks. You can not only protect assets, but you also get the benefit of privacy since trust terms do not have to be entered into the public record.
Can a living trust avoid federal estate tax?
The federal estate tax, also referred to as the death tax, is a tax on someone's right to transfer property after their death. In most instances, simple estates are not required to file an estate tax return with the Internal Revenue Service. If you have a complicated estate, however, you may need to considerthe potential impact of estate taxes.
Heirs typically don't have to worry about having to pay estate tax unless there's a sizable amount of assets at stake. Under IRS federal estate tax exemption rules, estate taxes don't apply up to certain limits. Here are the estate tax exemption thresholds for 2023 and 2024:
- Up to $12.92 million for people who die in 2023
- Up to $13.61 million for those who die in 2024
These amounts double for married couples. So, can a living trust reduce what you owe in estate taxes?
The short answer is no, as transferring property to a trust does not eliminate your obligation to pay estate tax if it's due. Even though the property is held in a trust, it remains part of your taxable estate.
You may, however, be able to remove assets from your taxable estate and minimize estate taxes using an irrevocable trust. If that's a strategy you're interested in, you may benefit from talking to an estate planning attorney who specializes in irrevocable trusts and estate tax management. They can help you decide which type of trust makes the most sense for tax purposes.
Which legal documents do you need to create a trust vs. will?
The exact legal forms you'll need to create a will or trust depend on where you live. Again, state laws determine the process and legal documents required to set up a living trust or make a will.
It's possible to find the legal forms you need to make a will or trust yourself online. Whether it makes sense to make a will or trust without the help of an attorney depends on your estate.
If you don't have a lot of assets or any minor children you need to provide for, then you could potentially draft a legal will in under an hour. Likewise, you may be able to create a simple trust document using an online software program.
Will and trust software programs can also include additional legal documents you might want to add to your estate plan. They can include:
- Power of attorney forms
- Financial power of attorney forms
- Asset inventory forms
- Estate planning forms for digital assets
- Living will documents for end-of-life care
Consider both a will and a trust for comprehensive estate planning
When comparing a trust vs. a will, remember that one isn't necessarily meant to replace the other. Both a will and a trust can help you to manage your estate assets in different ways. Reviewing your assets and thinking about what you ultimately want to happen to them can be a good starting point for deciding whether it makes sense to have just a will in your estate plan, or a will and a trust.
Frequently asked questions
Do financial planners help with estate planning?
Financial planners offer advice to clients on how to reach their financial goals. Part of that can include helping them create a strategy for meeting their estate planning needs. While a financial planner is not a substitute for an estate planning attorney, they can help you evaluate where wills and trusts fit into your overall financial plan.
Are online estate planning tools safe to use?
Online programs can be a legitimate and low-cost option for creating wills and trusts. When choosing which estate planning tool to use, it's helpful to consider the range of features and benefits offered, what the program is designed to do, and how much it will cost. You may also want to check to see if any fees you pay to use the tool include having your will or trust reviewed by a licensed attorney.
What does a trust protect?
Revocable trusts can be used to protect and manage assets while you're still living, while also allowing you to direct their management after you're gone. For example, if you'd like to ensure that your children graduate college before they can receive money from a trust fund you can include a stipulation that they do so in the trust document. Trusts also protect your privacy, as they're not subject to the probate process.
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