Living wills and living trusts can both be useful tools for estate planning. Though they sound similar, they each serve a very different purpose. A living trust is something you might consider for managing the transfer of wealth and assets to your heirs. A living will is used in medical care decision-making. When creating a comprehensive estate plan, it’s important to understand how a living will vs. living trust works and when each one can be used.
With so many options for creating an estate plan it makes sense to work with a professional financial advisor who really knows the lay of the land.
What Is a Living Will?
A living will is a legal document that allows you to specify what type of medical care and treatment you’d like to receive in end-of-life situations. For example, if you’re diagnosed with a terminal illness or lapse into what appears to be an irreversible coma, your healthcare providers can refer to your living will to determine what type of treatment is appropriate.
Living wills allow you to make clear what you do or don’t want to happen in a critical medical situation. For instance, you might include instructions about whether you’d like to be resuscitated or placed on a ventilator to keep you alive. You can also use a living will to specify whether you’d like to have your organs or tissue donated when you pass away.
The sole purpose of a living will is to let the people who are responsible for your care know what you do or don’t want to happen. This is different from an advance healthcare directive. An advance healthcare directive is another legal document that deals with medical situations but there’s one key difference. With this type of document, you can name someone to act on your behalf when making medical decisions.
An advance healthcare directive can be used in situations other than those involving end-of-life care. So, if you’re involved in a car accident and are temporarily incapacitated, the person you named to be your representative in the directive is authorized to make medical care decisions on your behalf. An advance healthcare directive can also include a living will.
What Is a Living Trust?
A trust is a legal entity that allows you to transfer assets to the ownership of a trustee. The trustee then bears a fiduciary responsibility to manage those assets on behalf of the trust’s beneficiaries, according to your specific wishes. A living trust, also referred to as an inter vivos trust, is a specific type of trust that takes effect during your lifetime. You can serve as your own trustee, with one or more successor trustees named who can take over if something happens to you. Or you can name someone else to act as the trustee, which can be an individual or a financial institution, such as a bank or wealth management firm.
Living trusts can be revocable or irrevocable. With a revocable trust, the transfer of assets to the trust isn’t permanent as long as you’re still living. That means you can add assets to the trust, remove assets, change the beneficiaries or change the terms of how assets in the trust are managed. An irrevocable trust, on the other hand, involves a permanent transfer of assets.
The types of assets you can transfer to a living trust include real estate, investment accounts, individual securities, bank accounts, collectibles and family heirlooms. You can then set the rules for how and when your beneficiaries can access those assets. For example, if you’re naming your children you might require them to finish college or reach age 30 before they can receive their inheritance from the trust.
Living Will vs. Living Trust: Which One Do You Need?
Whether you need a living will vs. living trust as part of your estate plan depends on your overall financial situation and goals. But it’s helpful to consider the advantages of including one or both in your planning efforts.
First, consider what’s useful about living wills. Having a living will in place means that you won’t be subject to any type of care or treatment that you don’t want to receive. If you don’t want to be on life support because you’re in a vegetative state, for example, you can let your doctors and loved ones know through a living will.
Living trusts can also offer several advantages, particularly for people who have larger estates. Here are some of the key benefits of living trusts:
- Assets held in the trust are not subject to the probate process as they would be with a last will and testament.
- Trusts can offer asset protection against creditors if your estate owes outstanding debts.
- You can specify when and how your beneficiaries will receive their inheritance.
- Revocable living trusts can be altered during your lifetime as your financial situation changes.
- You may be able to leverage them to minimize estate taxes.
Living trusts have something in common with living wills, in that they can be useful in situations where you’re unable to act on your own behalf. Say you own a business, for example. You’re in an accident that leaves you in a coma. Your living will can cover decision-making with regard to your medical care while you can use a living trust to offer direction on how your assets and finances should be managed while you’re incapacitated.
Living trusts can be used to meet a number of needs for yourself and your beneficiaries. For instance, if you have a child with special needs you could create a living trust to hold assets on their behalf. Those assets can then be used to pay for any specialized care they might require during their lifetime, even after you pass away.
How to Set Up a Living Will or Living Trust
Drafting a living will is something you can do yourself online. There are numerous websites that offer online living will software. You simply tell the software program what you want (or don’t want) with regard to end-of-life care and the document is generated for you. You’d then need to make sure your doctors and family members have a copy and are clear about your wishes.
If you don’t feel comfortable making a living will on your own, you could talk to an estate planning attorney about how to create one. An attorney can help you draft a valid and legal living will. And they could also help with establishing a living trust.
Living trusts are more complicated than living wills or a last will and testament so you may benefit from an attorney’s help. To create the trust, you’ll need to decide:
- Who to name as trustee and successor trustee(s)
- Which assets should be transferred to the trust
- Who the beneficiaries will be
- How assets in the trust should be managed
Creating the trust on paper is the first step; the second is funding the trust. This means transferring ownership of assets to the trust. Again, this is something an estate planning attorney can help with to ensure that assets are properly transferred.
Once you have a living will or living trust in place, remember to review them regularly. If you need to make changes to either one, your financial advisor or estate planning attorney can offer guidance on how to do so.
The Bottom Line
Choosing between a living will vs. living trust may be easier once you know how they work and what they’re meant to do for you. And you may decide that including both in your estate plan makes sense. At the same time, don’t forget about other estate planning tools you may need, such as a will or life insurance policy.
Tips for Estate Planning
- Trusts aren’t all alike and different types of trusts are designed for specific needs. A charitable remainder trust, for example, is good if you want to donate to charity. Marital trusts can help ensure a smooth transfer of assets to your spouse. Pour-over trusts are good for transferring any assets you might have left out of your trust during your lifetime while life insurance trusts are designed to receive the proceeds of a life insurance policy.
- Consider talking to a financial advisor about how to best manage accounts that can’t be added to a living trust. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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