Life tends to be pretty unpredictable—and that’s just about the last word you’d want to use to describe your finances. Thankfully, there are a few ways you can secure and control the future of your assets in the post-mortem.
The two most common types of estate planning are living trusts and wills. You’ve probably heard these terms before, maybe even used them interchangeably, but they’re actually quite different—and getting them confused could greatly impact how your assets are distributed later on down the road. In this post, we’re defining and comparing living trusts and wills so that you can make the most informed decision as you plan your financial future.
Looking for answers fast? Use the links below to skip ahead, or read all the way through for a complete overview of living trusts vs. wills.
- What happens if you die without a living trust or will?
- What is a living trust?
- What is a will?
- Overview: living trusts vs. wills
- How to choose: living trust or will?
What happens if you die without a living trust or will?
According to the American Bar Association, if you die without an estate plan, your respective state has the power to control how your assets are distributed according to their state regulations. In general, states will distribute the assets among the individual’s immediate family members, such as their spouse, children, or if none, to other close relatives.
An estate plan such as a living trust or will gives you control over your assets so that after you pass, the state can circulate your assets according to your wishes. There are a few ways you can plan for your estate, but living trusts and wills are the two most common categories.
According to a 2019 survey, 76% of adults in the U.S. said that having an estate plan in place was important, but only 40% actually have one. Despite these alarming statistics, creating a plan for your money and property should be a priority among your financial goals this year.
What is a living trust?
A living trust is a legal agreement that determines what happens with a person’s money or property following their death.
Before we discuss how living trusts are created and executed, let’s get to know the people who might be involved in a trust agreement.
In general, a living trust consists of these three different roles:
- The trustor: The trustor is the individual who creates the trust and dictates instructions for how their assets will be distributed.
- The trustee: The trustee is the person who the trustor selects to make certain decisions about the assets within the trust. The responsibilities of a trustee depend on the unique trust agreement but could include managing property, stocks, and the distribution of assets to the beneficiaries. A trustee can be an individual or an appointed financial institution.
- The beneficiaries: The beneficiaries are the individuals who inherit the money or property that’s described in the trust agreement. Depending on the agreement, the beneficiaries may receive some money or assets while the trustor is still alive.
Types of trusts
Now, not all trusts are created equal—some give you more control over your own trust document and others, not so much. There are three kinds of living trust agreements: revocable, irrevocable, and testamentary.
- Revocable living trusts: A revocable living trust is an estate agreement wherein the owner of the estate (the trustor) assigns certain assets to beneficiaries.
In a revocable living trust, the trustor acts as the trustee and has the right to change or terminate the trust as they choose. After the trustor’s death, the beneficiaries will inherit the assets that have been outlined in the final signed draft of the trust.
- Irrevocable living trusts: An irrevocable living trust is also distributed following the trustor’s death— but contrary to the revocable living trust, an irrevocable living trust cannot be altered (even by the owner) once it’s been established. Instead, the trustor assigns a trustee to control the distribution of the property as described in the trust. In some cases, an irrevocable living trust can be changed if all parties are in agreement.
- Testamentary trusts: A testamentary trust (also known as a will trust), is created when the trustor is alive. But following their death, the trust will have to go through probate (we’ll describe that in more detail below). After the trust has been proved to be legitimate, the assets will be under the control of the designated trustee until the beneficiaries are entitled to them. Sometimes a testamentary trust is used to distribute assets when beneficiaries reach a certain age or milestone, like graduating college.
Advantages and disadvantages of a living trust vs. will
Now that we know how a living trust works, let’s talk about some of the major advantages and disadvantages of opting for a living trust rather than a will for your estate planning.
Avoiding probate may allow your beneficiaries to access assets more quickly following your death
A living trust can save you money in probate fees
You’re entitled to more privacy if you don’t have to go through probate
A living trust helps avoid conservatorship (you can read more about conservatorships below)
If you’re considering creating a living trust, you should note that there are some drawbacks to this kind of estate plan, too. Here are some of the disadvantages of living trusts vs wills:
Trusts are typically more complex to draft than wills, so this may be a more time-consuming and intensive task for trustors to initiate
Living trusts don’t hold any major tax advantages since the beneficiaries are generally taxed on the assets inherited once they’re entitled to them
What is probate and why would I avoid it?
With the exception of testamentary trusts, living trusts are able to avoid probate which is a major advantage for certain parties. Probate is a legal process where your estate agreement is evaluated by a probate court who determines whether or not the agreement is legitimate. If the court agrees that the trust is valid, they give the trustee the go-ahead to distribute assets to the beneficiaries. In addition to asset distribution, probate is also when estate taxes are identified and paid for. Probate is handled on a state level, so each state may have different requirements that enforce or exempt the probate process.
There are a few reasons why trustors and their beneficiaries might want to avoid going through probate. For one, probate can take a long time to be finalized depending on the size of the estate and how long the state takes to process probate.
According to the Wisconsin State Bar, probate can take two years or longer for a complex estate and six months for an uncomplicated estate to go through probate. Second, the fees associated with probate can be costly. And finally, probate is considered a state legal proceeding, which means that the matter automatically becomes public information.
What is conservatorship and why would I avoid it?
As we mentioned previously, avoiding a conservatorship is one of the major advantages of opting for a living trust rather than a will. But what is a conservatorship, and why would one want to avoid it?
A conservatorship is a process that takes place after the trustor of an estate becomes incapacitated or otherwise unable to control their assets. If the trustor chose to create a living trust with their partner or spouse, he or she automatically gains access over the assets without having to go through any additional legal processes. If this process sounds like the simplest option for you and your spouse, you may want to consider making this one of your next couple’s financial goals.
If the trustor did not create a living trust with their spouse or partner, the family may have to go through conservatorship. Conservatorship is when the family of the trustor has to go to court in order to obtain the right to take control of their loved one’s finances and property. Much like probate, conservatorship can be a drawn-out process that trustors might not want to impose on their beneficiaries in the event that they cannot manage their own preceding their death.
What assets can go into a living trust?
Depending on the type of trust agreement you choose, your living trust may include some or all of these assets:
- Cash accounts such as checking, savings, and CD accounts
- Investment and brokerage accounts
- Nonqualified annuities
- Stocks and bonds certificates
- Personal property such as jewelry, clothing, antiques
- Business interests
- Life insurance
- Royalties, copyrights, trademarks, and patents
- Real estate
- Oil, gas, and mineral rights
- Monies owed to you such as a loan you’ve funded
What is a will?
Wills are similar to living trusts in that they are a method in which you can control your assets following your death. However, there are some important distinctions to make before you choose one over the other.
In a living trust, a trustor or trust maker would appoint a trustee to make decisions regarding their property and assets, but in a will, the individual (testator) can provide specific instructions for their property and appoint people to take over certain responsibilities as they please.
As part of their will, the testator can identify their beneficiaries, give details about how their assets should be handled, and choose an executor. The executor is the person who ensures all details within the will are carried out. In addition, a testator can also identify guardians to care for their children in the event that they die while their children are still minors.
Advantages and disadvantages of a will
Now that we know what a will does and how it’s different from living trusts, let’s take a look at some of the advantages and disadvantages of writing a will instead of a living trust.
Advantages of writing a will can include:
You can name parental guardians for your children
You can plan for personal matter such as burial preferences
You can alter or revoke your will throughout your lifetime
Disadvantages of writing a will can include:
Your will may have to go through probate if your assets exceed a certain amount
If your will is filed for probate, it becomes public information
Wills can also incur tax drawbacks if not planned properly
What assets are covered?
According to AARP.org, wills can include the following assets.
- Cash accounts
- Real estate
- Personal property
- Account numbers, passwords
- Burial instructions
However, they do not typically cover items like insurance or retirement plans.
Overview: living trusts vs. wills
Living Trusts vs. Wills: At a Glance
How to choose: living trust or will?
Like any financial milestone, choosing whether a living trust or will is right for you depends on your unique financial circumstance. Use this guide to help you weigh the differences between a will and a trust to find the estate plan that works best for you.