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living trust vs. will

Though it’s uncomfortable to think about death, it’s crucial to take certain steps to protect your assets before that time comes. Living trusts and wills are two estate planning options designed specifically to help you prepare for the inevitable. While one focuses largely on the management of your assets during life and after death, the other focuses solely on the distribution of your assets after you’ve passed away.

What is a Living Trust?

A living trust is a legal entity that allows an individual to place his or her assets under the management of a trustee. The trust’s ownership can either lie under the management of the individual or someone of his or her choosing. In other words, the trustee is either someone the trust maker appoints or the actual trust maker. It’s important to note that the trustee typically has a fiduciary duty to protect the trust maker’s assets. In addition, the trust can also have multiple named beneficiaries. These are people whom the trust maker gives access to their assets.

Now that we understand what living trusts are, let’s explore the two different types. When opening a living trust, you can decide whether you want it to be revocable or irrevocable. A revocable living trust allows you to retain full control over and cancel the trust whenever you choose. The irrevocable living trust, on the other hand, blocks you from cancelling it.

While largely opened for during an individual’s lifetime, a living trust can also continue to be enforceable after its maker’s death. However, it won’t continue if the trust maker decides to have it terminated at a specific date. Furthermore, if for some reason you’re unable to maintain the trust, you’ll have the option of choosing a successor trustee. A successor trustee manages the trust in your place. Successor trustees are also responsible for distributing the trust’s funds to your beneficiaries, following your death. Therefore, the fate of your trust will ultimately depend on your wishes.

But what assets can you transfer into a trust? You can make instructions about the succession of real estate, bank accounts, stocks and even life insurance under a living trust. Some assets, however, cannot be transferred to a trust, and others may require you to issue a new title under the trust’s name.

The method for setting up a living trusts depends on what state you do it in. The process in Iowa won’t be the same as in Ohio, Georgia or New Jersey.

What is a Last Will?

A last will gives you the power to decide what happens to your estate and assets following your death. It’s a legal document that details your last wishes, particularly those concerning the distribution of your assets and the care of any minors. What you include in your last will can vary widely, but you generally will include at least the following information:

  • An executor, who is in charge of shepherding your estate through the probate process and managing your estate according to the terms of the will.
  • Beneficiaries, the person or people who will inherit your property or other assets.
  • Information about your assets, including bank account information, location of assets and any other pertinent information. This is to help your executor streamline the process of determining how much your estate is worth.
  • Designated guardians for your children, if they are minors. This can be part of a joint will between two spouses.

A will does not immediately go into effect when you pass away. Rather, it must first pass through a legal process known as probate.

Living Trust vs. Will: What Are the Differences?

living trust vs. will

While both wills and living trusts establish procedures to manage and eventually distribute your assets to beneficiaries after your death. However, the two estate planning options diverge in their execution.

A living trust enables you to place certain assets under the management of a trustee. The assets in the trust are protected during the owner’s lifetime and then transferred to their beneficiaries if that’s what they desire. A will, however, dictates in advance how you would like your executor to handle and distribute your estate after you pass away.

With a living trust, you will be able to witness how your trustee manages your assets while you’re still alive. With a will, you will be gone before your executor’s duties even begin.

Additionally, opting for a living trust should allow your descendants to avoid the probate process. The assets in your estate should be disbursed more or less immediately upon your death (or on a fixed date, such as a child’s 18th birthday). By contrast, a will must pass through the probate process and could be contested.

Who Should get a Living Trust?

When it comes to living trusts, you ultimately determine whether you need extra protection for your assets. Living trusts provide an extra layer of security for assets like real estate, bank accounts and mutual funds, so it’d be best to measure whether or not your assets would benefit from such a fund.

Furthermore, a living trust can be a safety net in situations of illness and incapacitation. If you aren’t able to manage your trust’s money, your trustee will be able to oversee it in your absence. This will prevent the courts from hiring someone to manage your estate. Living trusts also allow you to leave your assets to your children if you so desire.

Who Should Create a Will?

A last will is a crucial estate planning document for just about anyone. Even if your will simply instructs the executor to adhere to the terms of your living trust, it’s helpful to create. If you don’t have a will in place, your beneficiaries could wind up having to deal with a longer, more complicated probate process. This will not only delay the distribution of your assets, but it will make it more difficult for your heirs to get closure following your passing.

A Word on Living Wills

There are living trusts; there are wills; and there are living wills. However, despite sounding similar, a living will has little to do with living trusts or wills.

A living will is a legal agreement that allows you to describe the medical procedures you’d like doctors to take while you’re in critical health. It acts to ensure that your wishes will be met on the occasion where you become incapacitated or medically unable to voice and make decisions for yourself.

Living wills essentially give you the power to control which procedures you’ll undergo beforehand. They also determine whether you want resuscitation, tube feeding or life support procedures. Additionally, living wills will permit you to specify matters like guardianship for your children, organ donation wishes and personal hygiene requests.

Bottom Line

living trust vs. will

In the living trust vs. will decision, it’s important to recognize both are helpful documents that ultimately fulfill your financial wishes. Indeed, you may choose to have both. The two estate planning options are signed during your lifetime, and both serves to protect you and your loved ones after your death. If you’d like extra security for certain assets, or you don’t want your beneficiaries to receive certain assets before they reach a certain age, a living trust may be a solid choice for you. If you want to have a plan in place to ease your executor’s task of closing up your estate, a last will is the way to do it.

Managing Your Money in Your Golden Years

  • Secure your retirement. Want to pass along wealth to your loved ones? First you have to grow that wealth and make sure it’s enough to last through your own retirement. Use our retirement calculator to see if you’re on pace for a secure retirement.
  • Seek Professional Help. Whether you’re trying to grow your nest egg or build an estate plan that protects your family, it’s a good idea to work with a financial professional. Financial advisors can help you map out your financial situation and determine the steps you should make moving forward. Use SmartAsset’s financial advisor matching tool to find an advisor in your area today.

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Rickie Houston CEPF® Rickie Houston writes on a variety of personal finance topics for SmartAsset. His expertise includes retirement and banking. Rickie is a Certified Educator in Personal Finance (CEPF®). He graduated from Boston University where he received a bachelor’s degree in journalism. He’s contributed to work published in the Boston Globe and has worked alongside award-winning faculty for the New England Center of Investigative Reporting at Boston University. Rickie also enjoys playing the guitar, traveling abroad and discovering new music. He is originally from Wilmington, North Carolina.
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