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What’s the difference between a will and a revocable living trust?
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If you’ve started to explore estate planning, you’ve likely encountered the terms "will" and "trust." Do you understand the difference between the two and how they can be used to protect your family and assets?
There are many estate planning options available and getting started can often feel overwhelming. This article will break down everything you should know about wills and revocable living trusts (“living trusts”) in estate planning, so you feel better equipped to make important decisions about protecting your assets and your family’s future.
Wills vs. trusts
While wills and living trusts do have a lot of overlap, there are several differences between them. Ultimately, both are ways to indicate who will receive your assets. They just do it in different ways, and each has its own advantages and disadvantages.
One big difference between the two is in how and when they take effect. Wills don’t go into effect until you pass away, whereas a living trust is effective immediately upon signing and funding it. Alternatively, in some cases a trust may be created under the terms of the will — this is a called a testamentary trust.
It may be easier to think of a will as a “simple” document. Wills allow you to:
Name guardians for kids and pets
Designate where your assets go
Specify final arrangements
For these reasons, a will is often an important part of a basic estate plan. However, the simplicity of a will does come with some drawbacks, including:
Limited control over the distribution of assets.
Because a will only goes into effect after you pass away, if you become incapacitated and unable to make decisions for yourself, a will, on its own, is ineffective for incapacity planning.
Wills are public documents that go through probate. Probate is a court-supervised proceeding and, depending on the complexity of your estate as well as your state’s probate process, it can be costly and take a long time.
A living trust can provide some great benefits and help to address some of the limitations of a basic will. A living trust:
Provides increased management and protection over your assets if you become disabled
Offers greater control over when and how your assets are distributed
Simplifies (or eliminates) the probate process
Applies to any assets you hold inside the trust
Can be amended or revoked by you at any time
Keep in mind that after you create a living trust, you also need to fund it by transferring assets to it, making the living trust the owner. This does make trusts a little more complex to set up, but living trusts have one major benefit over wills. Trusts are private documents that are often used to minimize or avoid probate entirely, which is a huge plus for some people. This alone could more than justify the additional cost and complexity of setting up a living trust.
Will or living trust — which is better?
When we’re talking about wills and living trusts, remember that they have very different and specific benefits. It’s not really accurate (or helpful) to assume one is “better” than the other. In fact, they are not mutually exclusive. You should start the estate planning process by assessing your situation, your goals and your needs. Then you can determine which tool(s) will help you protect your family in the most appropriate way.
Can you have both a will and a living trust?
Yes, you can have both a will and a living trust because they do two different things. Trusts provide for the management and distribution of your assets during lifetime and after death. A will, on the other hand, allows you to do things like name guardians for your children, appoint an executor for your estate, and declare your final wishes. A comprehensive estate plan can include both a will and a trust.
Most revocable living trusts (including the one you can purchase through Trust & Will) include what’s called a “pour over will.” This is a type of will designed to work in conjunction with your living trust. With a pour over will, most assets owned outside of the living trust (with the exception of assets that are paid via a beneficiary designation such as an IRA or life insurance policy) — as well as anything that is subject to their last will — will be paid to your trust at the time of your death. Pour over wills essentially act as a backup plan to ensure your assets get to your loved ones as intended.
What is a living will?
Note that a living will is also different from a last will and a pour over will (and yes, we know the names can get confusing). A living will refers to a set of documents related to an individual’s medical decisions.
Included in those documents are:
Medical power of attorney
Advanced healthcare directive
HIPAA authorization form
Trusts impact life and death
Because a living trust takes effect as soon as you sign it, it can simplify otherwise complicated processes and decisions for loved ones, relieving a tremendous potential burden from the shoulders. It’s very different from a will in that your trust not only plans for after you die, but also can outline intentions and provisions in the event you become mentally or physically unable to make your own decisions. Most importantly, a trust can make sure your wishes are known, during your lifetime and after you pass, so loved ones won’t have to wonder or make assumptions about what you would have wanted.
Planning for the future is important on so many levels. But it’s not lost on us that the process can seem overwhelming — where do you even start?
There are a lot of pieces to the puzzle, and too often people think “I’ll get to it later…” That’s risky. If you become unable to make decisions on your own, and you haven’t put a plan into place, all that burden and stress will fall on your loved ones. Creating an estate plan is a true gift to your family and friends.
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