You’re rockin’ and rollin’, getting your life together, coming up with a plan, getting the right insurance in place and now you’re thinking about wills and these things called living trusts. But you’re kind of scratching your head, wondering what’s the difference. Well, you’re in the right place. We’ll walk you through which is best—a living trust vs. a will—based on your situation. Because the last thing you want is to leave this world intestate, meaning without a plan in place.
First, trusts and wills are actually very similar. They’re kind of like siblings (without all the fighting). Both are legal tools that transfer your stuff to those you love. We’ll start with wills first since they’re more straightforward.
What Is a Will?
A will is a legal document that puts in writing what you want to happen when you die. A will outlines things like who you want to get your stuff and money, guardianship of your kids or pets, and even burial and funeral wishes—like if you want your brother to play that special song on bagpipes at your memorial.
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There are many different types of wills. But for most people, a simple will is enough. In fact, for 95% of people, a will is all they need to establish a rock-solid estate plan. One that protects your family if something ever happened to you (and it will, eventually at least).
Now, if you don’t have at least $1 million in assets, just stop here and get yourself a will. (Unless you really want to learn about living trusts as a kind of hobby. More power to you!)
If you do think you might be in that 5%, keep reading.
What Is a Living Trust?
A living trust is a separate legal entity that allows you to transfer your assets to loved ones quickly and easily. It’s like a bucket (or treasure chest) that you can add to while you’re alive to more closely manage your estate. It’s “living” because it’s in effect while you’re alive, as opposed to a will, which only kicks into gear at death. You can put in things like bank or savings accounts, cars, real estate, art, jewelry, and even things like intellectual property.
The best thing about a living trust is that it skips probate court, which is a big deal. Probate court is the judicial system that untangles the complexities found in wills, guardianship, trusts and other estate matters. If your estate gets mixed up in probate court it could mean your family has to spend the next year heading to court while grieving.
There are two main kinds of trusts: revocable and irrevocable. Don’t let the fancy terms confuse you. It’s really simple. Revocable trusts just mean you can change them. Irrevocable? Yep, you guessed it. You can’t change them. Revocable trusts are the most common. Fun fact: Revocable trusts magically morph into irrevocable at death.
How Does a Living Trust Work?
If you’re thinking you might need a living trust, here’s how they work:
- When you set up a trust, you become the owner of it, the grantor (also called a trustor or settlor).
- You pick a trustee to carry it out. They can be a family member, friend or a professional representative.
- You outline the terms in what’s called a declaration of trust.
- You then put things into the trust, or bucket. This is called “funding the trust.” Don’t forget to do this step. If you don’t fund it, it’s like buying a house and forgetting to move in. Or buying a car and never driving it. (Who would do that? Not you! So fund that trust.)
- You can then outline who you want to give your assets to. You can give a full inheritance to someone or divvy things up separately.
Benefits of a Living Trust
Living trusts come with some pretty great bonus features:
- While your will becomes a public document when you die, a trust is totally private. This means no one gets to sniff around in your estate once you’re gone.
- Trusts are less likely to be contested in court than a will. This means your legacy will be safe and secure.
- Trusts speed up and simplify the transfer of your things to family and friends, as opposed to a will which can get stuck in probate court. With a living trust, your trustee will handle dishing everything out.
- Your family won’t have to fork over big attorney or court fees. They can keep more of that hard-earned cash in their hands.
- You can add conditions to people receiving things. (So your trust fund kids don’t turn into actual trust fund kids.)
When deciding between a living trust vs. a will, there are a few more things to keep in mind. Living trusts come with a few downsides. (There’s always some kind of downside, right?)
- A living trust doesn’t establish guardianship. Only a will does that. So even if you’re getting a living trust, you’ll still need a will if you have dependents or pets.
- If you put your car into your trust, and then decide to sell it, you’ll have to first take it out of the trust. And it’s the same for all other assets. A little inconvenient but not a huge deal.
- Trusts can be expensive to set up and manage.
- It can be complicated and time-consuming to re-title and re-deed your assets to put them into the trust’s name.
Which Is Best?
Now comes the big question: Should you get a living trust, a will or (drumroll please) . . . both?
First, take a big-picture look at your needs and your overall life circumstances.
- Just get a will if you’re like the average person with a few kids and a house. You won’t need a lawyer to do it unless there’s something really complicated about your situation. With modern technology, wills are now easy to set up online by yourself.
- Get a living trust if you’re older, your kids are grown, and your estate is worth at least $1 million. This way you can avoid probate and actively manage your estate in a way that wills don’t allow.
- Get both a will and a living trust if you have an estate on the larger side and have dependents. (Remember, the will fills in that guardianship gap.) And if you do get both, don’t worry about them bumping into each other. They’re separate legal instruments and there are usually no conflicts between them (unlike siblings). If there is a legitimate conflict, a trust will typically override a will.
So, let’s wrap it all up. Everyone needs a will. Not everyone needs a living trust. Living trusts can be more than you need but they can also be a great tool if you have a larger estate.
If you’re in that 95% group, just get yourself a will. You’ll feel so much better knowing your stuff will go to the right people and that your family will be looked after for many years to come.