Sometimes called a advanced directive, a living will is a document that states your wishes in certain health-related scenarios. Whereas a power of attorney lets you give another person decision making power over your care and assets if you’re incapacitated, a living will lets you spell out exactly what you want done in specific cases. Often times, this involves what might happen if you’re in a coma or cannot be resuscitated.
Trusts are a great way to provide for the people, animals, and organizations you care about. In a trust, you set aside certain assets outside of your last will. This keeps them from going through the probate process (which can be expensive and slow) and usually, the taxes on assets in your trust are less onerous than traditional estate taxes. Living trusts (revocable trusts) and wills are methods for carrying out your wishes and providing instructions for disposing of your real and personal property when you die. Both documents offer instructions for your representative about how you want your assets distributed in the event of your death, but there are huge differences that can make a will or a living trust preferable over the other when preparing your estate plan.Although the documents might appear on the surface to be similar, there are five top differences that you absolutely need to know when making a decision about which one to use:
1. Avoid probate.
Avoiding probate is the single biggest reason why people set up revocable trusts. Why would someone want to avoid probate you ask? Probate proceedings frequently require costs for the services of an attorney, court fees, appraisers, accountants, and other expenses that can reduce the value of the estate you are trying to leave to your children, spouse and heirs upon your death. In fact, probate can eat as much as 5-10% of an estate depending on circumstances. The preparation of court petitions, appraisals and property inventories, as well as the notification of heirs and others named in a will can make probate proceedings long and drawn out and can last 6-12 months if there are no unexpected challenges.As a public hearing, probate gives outside creditors the ability to make a claim on the assets to be distributed; those include legitimate creditors and questionable ones. For example, your mother’s friend comes out and makes a claim stating that she lent your parents $50,000 in 1971. Nobody recalls, there are minimal written records, your parents never mentioned it, and they are not around to challenge her claim. What happens? The court may hire an investigator and the cost of the investigator comes out of the assets and the time to investigate could be 3 additional months. Perhaps they eventually settle for $25,000. After all creditors are paid, the judge then reviews the will and tries to abide by the wishes. However, then your brother is upset that he did not get an equal share, so he challenges it; claiming your father did not have a healthy mental state when he signed the will or another dozen reasons used to challenge it. This could delay the process for 4-6 month and the cost of expert witnesses could dwindle the estates assets further. The judge ultimately makes the final decision who gets what, and hopefully he follows the will to the best of his ability, but do you really want to rely on someone else that you donate know to make the final determination?A living trust avoids probate completely, and all of the potential pitfalls that come with a probate hearing, by allowing your successor trustee to distribute your assets according to the terms of your trust agreement. Property can be distributed to the people you have named in the trust immediately without the costs and delays of court proceedings. Finally, another benefit is that there is no public scrutiny or open doors for claims to be made that are not legitimate during a probate hearing. A revocable trust, however, offers no estate tax planning benefits. The assets are treated by the IRS, Medicaid, and creditors as if you owned them outright.
2. Privacy concerns
Your will becomes a public record once your will is filed in a probate proceeding after your death. If you wish to keep your personal and financial affairs confidential, a living trust might be a better option than a will because it does not have to be filed in a public court if you die.When the creator, also known as Grantor or Trustor, of a trust dies, a probate or other court is not involved in any proceedings to distribute the assets owned by the trust. Typically with a living trust, there is a successor trustee and he is responsible to review and follow the terms of the trust agreement for the distribution of the assets. The laws in some states require that the beneficiaries named in a living trust be given a copy of it after the death of the trust creator. Other states only provide the beneficiaries with the portion of the trust agreement that pertains to them in order to maintain the privacy of the deceased.
3. Ease of creation.
Living trusts tend to be slightly more complex and can require greater effort to prepare than a will depending on how complex your attorney makes it (example: do you leave out your brother with a no-contest clause, or do you leave him a little something so that he does not spend money challenging the will?). Aside from legal requirements concerning their signing in the presence of witnesses, most states do not require specific language for a will, and some states even accept handwritten wills for probate as long as they are signed in the presence of the state-mandated number of witnesses.Living trusts, on the other hand, typically specify the duties of the trustee, who is typically yourself and the terms can be changed at any time, and how property is to be managed during your lifetime. The details that must be included in a living trust can make them more complicated than a simple will. Even though wills might seem to be more complicated as far as requiring the presence of witnesses during the signing process, living trusts must be signed in front of a notary public – typically found at your local banking branch and costs little to nothing. The requirement that your assets be transferred to the trust can add to the complexity of the process, but it could be worth it if all proâ€™s and conâ€™s are weighed.
4. Assets must be transferred into a living trust.
Any property deed being managed by the trustee of a living trust must be actually transferred into the trust. Property that is not transferred into the trust will not pass to those you have designated to receive it upon your death without going through the probate process. Wills do not involve the transfer of assets prior to your death.Items of personal property without a deed or public record are easily dealt with under a living trust simply by listing the items and attaching the list to the trust agreement. Real property or personal property involving title documents, such as motor vehicles, real estate, bank accounts, can be more complicated. In the case of real property, a new deed must be prepared and recorded transferring title to the trust. Motor vehicle title transfer documents must be prepared and filed with the applicable state office. Although the items are not subject to probate, they are still owned and controlled by the creator of the the trust and therefore offer no asset protection. Revocable trusts are subject to creditors, Medicaidd spend-down and lawsuits during the creatorâ€™s lifetime.
5. Managing assets in case of disability.
A will does not become a legally enforceable document until it is probated following the death of the creator. A living trust or, as it is also known as, an inter vivos trust or revocable trust, places your assets under the control of a trustee to manage during your lifetime. An advantage of a living trust is that you retain the power to appoint anyone, including yourself, as the trustee and you may change this at anytime. You can also change beneficiaries or cancel the trust altogether at anytime.Once your assets are transferred to the trust, your mental incompetence or incapacity cannot affect the authority of your trustee to continue manage. Even if you appoint yourself as the trustee of the living trust, appointment of a successor trustee eliminates the need for a court proceeding to have a conservator appointed to look after your property in the event of your incapacitation or incompetence.To summarize, a will inherently means your assets will go through probate. An revocable trust will allow you to avoid probate, but nothing more. If you are looking to avoid probate as well as minimize estate taxes, protect asset from Medicaid, or Protect assets from creditors, then you may want to consider comparing an irrevocable trust with a revocable trust.