Homonyms are words that are spelled the same but mean different things. The word “will” is a perfect example, meaning many things, from defining a person’s mental strength, to serving as a verb, or a legal document. In the same sense living wills and living trusts are completely different from one another, in a sense that is not reflected when comparing, say, a last will and testament and a testamentary trust.
Although trusts serve the same function and exist only to address specific needs and challenges under certain circumstances, a living will and a “normal” will are two very different estate planning tools. Knowing the difference can help you navigate your own estate plan, or better communicate to your estate planning professional what it is that want.
Differences Between Trusts and Wills
A last will and testament is a simple document that describes the contents of your estate, and to whom you leave them. When a person passes without will or other estate planning measures, their belongings are distributed to the next of kin as per intestate laws. A last will allows you to determine who gets what and can even be used to name the executor of the will (the person in charge of filing and the logistics of distributing the estate), and the guardians of your minor children.
A living will, on the other hand, is a document that details what procedures you do and do not condone in the event of a complete incapacitation. It serves as a reference for what you do not wish medical professionals to do with you in the case of certain diseases, disorders, and accidents. A living will serves as an alternative to a healthcare/medical power of attorney if you do not want these decisions to be decided by someone else. Unlike a last will, it has nothing to do with where your property goes, but instead details your healthcare preferences.
Understanding Living Trusts
A living trust is, in the simplest of terms, the act of placing the ownership of something in the care of someone else, for the benefit of a third party. In a legal sense, most trusts are described as “fiduciary relationships”, wherein a trust agreement is created, signed, and notarized to remove ownership of a property from the original owner to another party, known as a trustee.
This trustee does not actually own the property, but only manages the trust, which exists as a separate entity. For something to be accepted into a trust, its ownership papers (such as the deed for a building) must reflect that it belongs in a trust, rather than to the owner (the grantor/creator of the trust).
Once certain obligations are fulfilled, the contents of the trust are handed over to the beneficiary of said trust. Trusts can be used to avoid estate taxes, creditors, and gift-taxes when giving to your children. However, not all trusts are capable of these things.
Trusts are either living or testamentary. Unlike a living will, which describes an individual’s preferences for medical treatment, a living trust is simply a trust document that goes into effect while the grantor/creator of the trust is still alive. A last will and testament, in contrast, only goes into effect upon the person’s death. The alternative is a testamentary will, which does not go into effect until a person’s death. Living trusts are beneficial as more than just estate planning tools, although the key is in knowing what type of trust you need.
For example, a trust only counts as a form of asset protection (keeping your property safe from creditors) if it is an irrevocable living trust. This is a type of trust created and activated while you are alive, completely separating yourself from your property without selling or giving it away, instead keeping it “in-trust” to pass on to a beneficiary after death.
Unlike revocable living trusts which allow you to retain some form of control over your property, an irrevocable living trust essentially cuts you off from it. This way, you can keep certain property safe for your children/spouse/family despite debt.
Other trusts address different needs. A charitable trust allows you to set aside part of your estate to continue gifting to designated charities after you have died. A spendthrift trust allows you to assign a trusted and independent trustee to control the portion of your estate that you would like to bequeath to a beneficiary incapable of responsible spending, or to ensure that a member of your family who struggles with finances due to disability can still benefit from your estate. Because they do not give your beneficiary direct authority over their inheritance, this type of trust can also protect them from creditors.
Trusts are flexible and powerful, but also more difficult to set up, and depending on how they are set up, may be costly to maintain. While they can serve many purposes and allow you to make the most of your estate and cater to very specific needs and challenges, not everyone needs a trust.
While living trusts and living wills are very different from one another, both effectively protect you (or by extension, your estate) from mental incapacitation. While a last will only goes into effect when you die, a living trust can move financial control over trust assets from you to your trustee if you are mentally incapacitated. In the same way, a living will provides guidance to medical professionals if you are alive but unable to communicate.
Other Estate Planning Options
There are wills and there are trusts. But there are also many other tools and options that can help you create the perfect estate plan. Examples include a HIPAA (Health Insurance Portability and Accountability Act) authorization/release, DNR (do not resuscitate) order, or life insurance.
Contrary to what many may think, many of these specialized options are neither expensive nor very complicated, instead serving to help everyday Americans further specify how they want to go, and what they want to leave behind.
Making the Most of Your Estate Plan
It is no wonder that you want the best. Everyone is entitled to pursuing the best – but what is best for person A may not be best for person B. This holds especially true in estate planning. There is no “useless” estate planning tool, but your perfect estate plan will only employ a select few useful techniques depending several factors, most notably the size of your estate and your family.
While living trusts offer a whole slew of benefits, they also often address issues that many people do not face. Living wills can save your family a lot of pain and confusion, but not everyone wants to codify their opinion for a situation they have never experienced, fearing perhaps that in the moment, they may change their mind and regret not opting for treatment.
Trusts, wills, and other estate planning documents exist to help you go out the way you choose and like best. It is a complicated and often quite stressful topic, but professionals exist to help you navigate your estate planning options and find the best fit as per your state’s laws, the specifics of your estate, and your own opinions.
Be sure to schedule an appointment with an estate planning professional for more in-depth information, as well as advice on how to plan for your eventual passing.