When life ends, we lose our need for material wealth. While no one knows what lies beyond a grave, we do know that our properties and belongings will not do us much good – and instead, we seek to pass these on to the next generation.
However, the world of property laws and ownership is a complicated one. While passing property from one spouse to another is typically not complicated due to the benefits of marital joint ownership and state laws regarding the next of kin, passing your assets onto the next generation is a much more involved process.
Estate planning tools (such as a revocable living trust) and inheritance methods (such as a last will and testament) exist to provide you with a modicum of control over the exact distribution of your assets after you have passed away. Yet one is not like the other – and deciding which is best for your circumstances requires you to understand both.
The Last Will and Testament
A will is a document declaring your will in the matter of inheritance. However, there are limitations to what a will can do – and there are things that solely a will is capable of.
To create a will, you must detail in writing what your wishes are regarding the distribution of your assets, and the care of any minor children (i.e. determining guardianship). Most wills are prepared and signed before witnesses, to ensure that they are deemed valid in court. Wills without witnesses or an oral will (spoken testaments) is much harder to prove and may have a tough time passing probate.
Probate is also the major drawback to a will. It is a legal process by which a special court determines the legitimacy of a will. Probate can take several months, and cost your family a lot of time and money.
Understanding Living Trusts
Unlike a will, which is a document detailing what happens to your assets after you die, a living trust is an estate planning tool that allows you to bundle your property and monies “in trust”, with a designated beneficiary.
Revocable living trusts can be changed at any point in your life, and allow you to continue retaining full ownership until you die. An irrevocable trust means transferring your assets into the trust and giving up ownership, with the benefit that this allows you to eliminate tax liabilities on assets you cannot generate a profit from.
To set up a living trust, you are required to create a document cataloging all the assets you would like to transfer into the trust. Then, you will have to appoint a trustee – someone to help manage the trust and ensure that your assets are transferred to the right beneficiaries after your death. You can be your own trustee while still alive, but you must assign a successor.
Living Trusts Are Effective Immediately
A trust goes into effect immediately, once you fund the trust – after detailing your assets in a trust document, you must separately transfer your assets into said trust by amending your ownership. Once this is done, certain tax advantages and savings can be taken advantage of, especially for married couples in the form of joint living trusts and a credit shelter trust.
A trust also allows for the distribution of assets in the event of full disability if you so choose, whereas a will only goes into effect after your death.
Wills Can Appoint Guardianship
While a trust has the benefit of more precisely determining how you would like to distribute your assets, allowing you to control the way your assets are provisioned (in the case of passing ownership over to a minor child, for example), couples with minor children may consider a will due to the ability to determine guardianship.
A trust only allows you to determine the distribution of your properties and monies, not your children.
Living Trusts Include the Management of All Properties
There are limitations to what a will can pass on, namely, it can only pass on what you own under your own name alone. A living trust can distribute any property funded into it – meaning, you can transfer life insurance, securities, accounts and more into your trust.
Joint ownership of property (real estate and other forms of property, such as motor vehicles) can be transferred into a trust so that only your interest in the property is funded into the trust. That means that if you pass away, your beneficiaries gain your portion of the ownership of a property or asset. This is not possible with a will.
Wills Are Simpler Setup
Wills are simpler to set up – all you must do is draft a legal document, sign it in the presence of a few trusted witnesses, and file it.
However, this also means that no will is iron-clad. Your will can be contested, or deemed invalid/fraudulent. A will also necessitate probate, which means your inheritors may face a lengthy waiting period and more.
Living Trusts Help to Avoid Probate
At the end of the day, the biggest reason to choose a trust over a will is the matter of probate. Probate courts are a place you would want your loved ones to avoid at all cost – otherwise, your beneficiaries may find themselves filling out paperwork, paying attorney fees and going back and forth with local government for anywhere between 6 to 18 months, losing a percentage cut of your estate in the process.
Probate can be unnecessarily lengthy and will be hassle first and foremost – yet probate is irrelevant when most of what you own is in a living trust. Note that, if you opt to set up a living trust, you must update it and add new wealth as you earn it, otherwise whatever you own that is not covered through your trust will end up going through an even lengthier probate process.
The alternative is to write a pour-over will – this is a will designed to catch any assets that may have been left out of your living trust at the time of your death. While this must go through probate, it will ensure that you end up passing on most of your property without additional costs or hassles for your loved ones.
The idea behind inheritance is to create a smooth process through which most of your wealth can seamlessly pass on to the next generation. In most situations, the best way to do that is through a living trust. Setting up a trust can be inexpensive when done right – and with the help of a specialist and some legal aid, you can get started in ensuring that what you own is accounted for and ready for inheritance.