It’s never pleasant to think of the contingencies you might have to set in place to account for your death. Life is unpredictable, and things can happen when you least expect them. That’s why it’s essential to prepare for the unexpected by ensuring that our affairs are in order should the worst come to pass.
Estate planning is not as confusing as it might seem at first. If you are adamant about where your priorities lie, you can easily coordinate with an estate planning professional to develop a set of concise documents and instructions to ensure that everything is handled smoothly in your absence.
But you have to be well informed to make the best decisions. Estate planning tools can be very flexible. Putting that flexibility to good use allows you to have complete control over how your estate will be used and distributed in the future.
Two of the most popular estate planning tools for bequeathing wealth after death are the will and the trust. While similar, mastering their differences can help you put together a comprehensive estate plan.
What is a Living Trust?
Trusts are legal entities that hold assets in trust. They are created by trustors or grantors, who usually own the assets placed within the trust (or “funded” into the trust). Trustors give trustees, another party, the managing rights over the trust, either immediately or after they pass away (as successor trustees).
Finally, once the trustee takes over, it becomes their responsibility to manage the trust as per the trustor’s instructions for one or multiple beneficiaries.
While this sounds needlessly complicated, it can be simplified by thinking of a trust as a safety deposit box with three parties: the creator of the box, the manager of the box, and the people who inherit the box’s contents, as well as any income the box’s contents produce.
Living trusts distinguish from testamentary trusts in that the trust is created and funded while the grantor is still alive. This means that the trust functions and holds assets. In contrast, the trust’s creator continues to benefit from it, either by enjoying certain ownership privileges (as with most revocable trusts) or other benefits (such as the asset protection provided by an irrevocable trust).
Testamentary trusts are named such because they are usually created through a person’s testament when they die.
Different Types of Trusts
There are many different types of trusts, but we’ve touched on some of the most important dividing characteristics, such as living or testamentary trusts, as well as revocable and irrevocable trusts. Where revocable trusts can still be amended, irrevocable trusts cannot. This simple quality can significantly change the way a trust works and allow it to function in ways it couldn’t while still-revocable, such as providing certain tax advantages at the cost of losing ownership privileges.
The world of trusts is a complicated subject. Still, most living trusts designed for estate planning have a specific role to play: the direct transfer of assets from the grantor to their beneficiaries after death, without the need for probate, and at a much greater degree of control.
Trusts allow grantors to set conditions for the bequeathment of certain assets and give them a vehicle through which to manage assets for a beneficiary who might not be ready to receive them yet, while still paying out income to them as a way to provide financial security after death.
All this functionality comes at a steeper financial cost than other estate planning tools. For larger estates, the benefits often far outweigh the cost.
What is a Revocable Will?
A will and testament is a witnessed and notarized document that describes your wishes concerning the bequeathment of your assets and belongings after death.
Wills can also be used to name administrators for your estate (i.e., the person tasked with managing and distributing your belongings when you die), as well as guardians for any children you leave behind.
Wills are revocable in the sense that they can be amended. However, the most straightforward and smartest way to change a will is to create a new one. Only the last will and testament is ever valid. This means if you’ve made twenty wills in the previous fifteen years, the only one that ever matters is the last one you made.
There are unique and complicated exceptions, such as if the last will can be argued to be invalid due to coercion, loss of mental faculties, or elder abuse/fraud, in which case the last valid will is taken into account. But by and large, revoking will requires you to make a new one.
Different Types of Wills
As with trusts, wills come in different shapes and sizes. The parameters for a valid will may change based on the state you live in. In general, a will must be witnessed by several people who are not the will’s authors or beneficiaries, and a will must be notarized.
Holographic wills, which are handwritten wills, can generally get away with no witnesses so long as it can be proven that the will was written in the decedent’s handwriting.
The requirements for a will to be valid are usually strict, but there are unique circumstances under which much less formal wills may be accepted and recognized, such as a soldier’s last wishes in combat. If a will isn’t written down but related verbally, it’s called a nuncupative will.
Living Trust vs. Revocable Will: Which One Should You Choose?
Trusts and wills are often placed in direct opposition to one another, but this is a flawed way of looking at estate planning. It isn’t that you must choose between one or the other, and it is a question of whether you need one or both, to what degree, and for what purpose.
Working with an estate planning professional can help you take all the guesswork out of estate planning and reduce it to its essentials by relaying your priorities and wishes and working on a plan that puts these to action in the most cost-effective manner. If you need more information on a living trust vs. revocable will, contact an estate planning professional.