Wills and Living Trusts are basic components of an estate plan. But what is the difference between the two and which is right for you?
The Basics of Estate Planning
Before discussing the differences between a Will and a Living Trust, it is important to understand the definition of estate planning. Estate planning is the process of anticipating and arranging for disposal of your property during your life and after your death. A basic estate plan typically includes a Health Care Directive, Durable Power of Attorney, and a Will or Living Trust.
A Health Care Directive outlines your preferences for health care during a serious illness when you are unable to communicate your preferences. It also typically appoints someone to make health care decisions for you if you are unable to communicate or are not mentally competent to make a decision. A Health Care Directive is also commonly referred to as a Living Will or Advance Directive.
A Durable Power of Attorney authorizes someone to represent you or act on your behalf in financial matters. It is called “durable” because it continues to be effective if you become incompetent. The primary purpose of the Durable Power of Attorney, in this context, is to avoid the need for appointment of a Guardian or Conservator if you become mentally incompetent to manage your finances.
What is a Will?
A Will is a written document that indicates how your property will be distributed at the time of your death. It is not effective until after your death and can be amended or revoked during your lifetime. Even if you have a Will, your estate will still have to have to go through probate, which is the court process of administering your estate.
What is a Living Trust?
A Living Trust is a legal arrangement in which you (Trustor) give fiduciary control of your estate to a person or institution (Trustee) for the benefit of your beneficiaries. It is referred to as “living” because it is created during your lifetime. A Living Trust can be revocable or irrevocable, but will usually be revocable to allow you to change the terms of the Living Trust during your lifetime.
When utilizing a Living Trust for estate planning, your property is actually retitled into the name of the Living Trust or to the Trustees of your Living Trust. If your property is retitled in this fashion, you are able to avoid probate. This is important because your estate will avoid the cost and inconvenience of a probate proceeding and it will allow your financial matters to remain private. Further, unlike a Will, a Living Trust is immediately effective, so it can be used for incapacity planning.
While the advantages of avoiding probate and providing for incapacity planning sound attractive, the disadvantage of a Living Trust is that it is more costly to set up. This is because you must transfer title of your property to the Living Trust in order for it to be an effective estate planning tool. If you do not transfer property into the Living Trust, your estate will be subject to probate and the associated cost and inconvenience.
Will vs. Living Trust
In deciding whether a Will or Living Trust is more appropriate for your situation, the primary factor is cost. A Living Trust has advantages beyond a Will (i.e. incapacity planning and avoiding probate), but will involve more upfront effort and expense. If you are not able or willing to bear this initially higher expense, a Will may be the better option for you.
Because advice on estate planning is largely dependent on the circumstance of your individual case, it is important to talk to an experienced attorney. To speak with an experienced estate planning attorney, contact Tentinger Law Firm at 952-953-3330 or use our quick contact form.