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What is a will & a living trust?
What is a living trust?
Does a living trust avoid probate?
What is the difference between a will and a trust?
Jan 10, 2024 · Personal Finance. Living trust vs. a will — What’s the best way to pass an inheritance to your family? Wills and trusts are both used for estate planning but have big differences you...
- Overview
- Key Points
- Will vs. living trust: An overview
- Some assets transfer directly to beneficiaries without a will or living trust.
- Revocable vs. irrevocable trust
- Tax benefits of a living trust vs. will
- Estate Planning Checklist
- Costs of setting up a living trust vs. a will
- The bottom line
Estate planning 101.
Written byMiranda Marquit
Miranda Marquit
Miranda is an award-winning freelancer who has covered various financial markets and topics since 2006. In addition to writing about personal finance, investing, college planning, student loans, insurance, and other money-related topics, Miranda is an avid podcaster and co-hosts the Money Talks News podcast.
Fact-checked byThe Editors of Encyclopaedia Britannica
The Editors of Encyclopaedia Britannica
•A will is a relatively simple document that outlines how you want your assets to be taken care of after you die.
•A living trust is a more complex legal arrangement in which you transfer ownership of your assets to another entity to be managed according to your wishes.
Before making a decision about whether to use a will or a living trust, it’s a good idea to understand the difference between these two estate planning tools:
•Will. A will is a relatively simple document with instructions on how to distribute your property and assets after your death. A will is usually subject to probate, which is the state’s process of reviewing assets and property and administering the transfer of those assets to heirs and beneficiaries.
•Living trust. A living trust is a separate legal entity designed to hold property and assets; it is set up while you are alive. When you create a living trust, ownership of your assets passes from you to the living trust. These are more complex arrangements that have the potential to avoid probate, depending on how the living trust is structured.
It’s important to note that even though there are differences between wills and living trusts, both of these estate planning instruments are governed by state law. Before using a will or a living trust, you should familiarize yourself with the rules as they apply to your state. If you’re unsure—or if your estate has any complexities—you should probably consult with an attorney or estate planning professional. They can help you understand the pros and cons of a will versus a living trust (see more below) as they relate to your circumstances, and they can draw up the necessary documents.
If you have a retirement plan or life insurance, you have already declared beneficiaries on those policies. When you die, these accounts will automatically transfer to your listed beneficiaries and will not be subject to probate.
Key differences between a will and living trust include:
•Ownership of assets. With a will, you still own the assets until you pass and they’re distributed to your heirs and beneficiaries. When you use a living trust, the living trust owns the assets—you don’t. The assets are managed on behalf of the beneficiaries, which can include you during your lifetime and your heirs after you pass.
•Taxes. A will doesn’t stop your estate from being subject to estate and inheritance taxes (when applicable). Certain types of living trusts, however, can provide a shelter against specific taxes after you pass, smoothing the way to pass your assets on to your heirs without greatly diminishing the value of your estate.
•Ability to change. Wills are relatively easy to change. You can update your will throughout your lifetime with a minimum of fuss. In contrast, living trusts can be difficult to update. Even a revocable living trust, which can be changed while you’re alive, is often harder to change than a will. An irrevocable trust is practically impossible to change once put into place.
•Cost. Because of their relative simplicity, wills are usually inexpensive to create. Some lawyers offer affordable will packages. You might even be able to create your own will—free or at a nominal cost—through an online template. Living trusts are more complex and therefore more expensive to create. On top of that, there are ongoing costs associated with managing a living trust.
Getting lost in the trust jargon? Britannica Money breaks it down.
Testamentary trust. Another estate planning option is the testamentary trust. This is a trust created by a will. You might direct that, upon your death, a trust is created and your assets be put into this trust. That way, after you die, your assets will be managed on behalf of your beneficiaries, without the property going directly to them. If you have minor children, or if you have adult children with special needs who are unable to manage their own affairs, a testamentary trust might make sense.
It’s important to be clear about your goals.
Some people like the potential tax benefits of living trusts. An irrevocable trust can shield included assets from estate taxes. However, if you create an irrevocable trust, you have to give up control of your assets. You can’t help manage them, even if you’re a beneficiary.
Ready to start? Download the Britannica Money Estate Planning Checklist.
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Before you decide to create a living trust just to avoid probate, it’s important to consider the costs involved.
In general, wills are somewhat inexpensive. In fact, in many states, you can create your own will free of charge. A simple declaration of what you want to have happen after you die is often recognized by most states as legally binding. However, your will is subject to probate and interpretation by the state.
The final will-versus-trust decision is based on your specific needs—your assets, your heirs, the complexity of your estate, and more. A will is often sufficient for most people who have small estates. However, if you’re concerned that the value of your assets and property will exceed estate tax exemptions and you want to reduce taxes, an irrevocable trust can be a solution—as long as you’re willing to give up some control over your assets.
Carefully consider your needs, enlisting the help of an estate planning specialist, and remember that you can have both a will and a living trust to ensure your wishes are carried out after your passing. And once you’ve set your plans in place, be sure to communicate your estate plan wishes with your loved ones. It’s best to have open and honest end-of-life discussions while you’re healthy, so there are no surprises later.
A Living Trust is a type of estate planning document that allows you to distribute assets and property to loved ones after your passing. Within this context, a Will and a Living Trust perform the same function. However, a Living Trust is very different from a Will in the way it operates.
Apr 23, 2024 · 1. Living trusts and wills are tools used to direct your assets to your heirs. 2. Wills allow you to name guardians and direct where your assets will go after your death. 3. Living trusts can distribute your assets before or after you die, and they may provide tax advantages.
May 22, 2022 · Both can be useful under certain lifetime situations, but living wills and living trusts actually serve two quite different purposes. A living trust covers three phases of your life, while a living will only cover what happens if you become incapacitated.
- Julie Garber
Oct 3, 2023 · The main difference between wills and a living trust is that the directives of a will only come into play after the testator dies. You can change a living trust during your lifetime. After creating a living trust, you can transfer or omit certain trust assets as you wish.
Apr 24, 2024 · Unlike a will, which automatically distributes all of your assets, a living trust can only distribute assets that you specifically place into it, so if you don’t correctly transfer ownership of your assets, they aren’t part of the trust. When you complete living trust forms, the trust is not fully functional until you fund it.
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related to: Are wills and living trusts the same thing?Schedule an Appointment at Your Convenience at a Bank of America Near You. Visit a Newly Opened Bank of America Branch. Check Hours and Services Available Online.
