Trusts & Wills. The Basics Of Each

Wills & Trusts. Not A Sexy Topic, But An Important One !

Over the last few weeks, many of you asked if I would write a BLOG post on wills & trusts. Most of this was brought on by the recent passing of a music legend, Aretha Franklin who we learned did not have a will or living trust when she died. As we have quickly learned this can be an unfortunate event and create unintended consequences for your family and loved ones. It is important we all understand trusts.

If you die without a valid will, you’ll become what’s called intestate. That usually means your estate will be settled based on the laws of your state that outline who inherits what. Probate is the legal process of transferring the property of a deceased person to the rightful heirs.

Personally, up until 5 years ago, we didn’t have one either, not a legitimate one anyways. I vividly remember downloading a form online, scribbling something to paper, having it notarized and that was my will. It was a last-minute move to protect what little assets I had before heading out on a flight out of the country while I had two young kids at home as a single father at the time.

What I came to find out is that it wouldn’t of held up in a court of law and would have left me in the same situation of No Will as 60% of our population. Did you know that only 2 of 5 people over 40 have a will? Even less, about 20% have a living trust.

Most of us have heard the terms “wills” or “trusts” but not many people understand and know the differences. there are also different types of trusts and there are different types of wills. Net, both can be very useful estate planning options, each that serve a different purpose. Together, they are a key part of a comprehensive estate plan. It is important to know the differences between living trusts & wills.

Living Wills & Trusts. 101 Overview

This is a deep and complex topic so I will attempt to keep it simple and basic. While this won’t exhaustively cover all of the nuances and specifics, it will get you started and help guide you on your decisions.

A will is the most common estate planning tool. A will is a written document (signed and witnessed) that indicates how your assets are distributed to whomever you choose in the amount and manner that you choose. This includes financial assets, gifts & donations, minor children and even deciding who is responsible for managing your final affairs. It is important that a will be created and written in accordance with the laws of the jurisdiction of where it is created (e.g. the state you live in).

While you will not be able to forgo a probate period, having a will, however, speeds up the probate process and informs the court how you’d like your estate divided.

A living trust is another less common estate planning tool. A living trust is a trust structure that provides lifetime and after death property and asset management. A trust is a legal arrangement through one person (or an institution) called a trustee who holds the legal title to property for another person – a beneficiary or beneficiaries. A trust has flexibility to specify exactly how and when assets pass to beneficiaries.

Trusts create significant benefits that can allow you to control your wealth, help protect your legacy, prevent your financial affairs becoming a matter of public record and reduce (or limit) estate taxes.

It is important to know the differences between living trusts & wills.

Living Wills & Trusts. The Differences

There are several differences between the two. One main difference between a will and a living trust is that a will goes into effect only after you die. A living trust takes effect as soon as you create it. A will is a document that directs who will receive your property at your death and it appoints a legal representative (e.g. executor) to carry out your wishes. By contrast, a living trust can be used to begin distributing property before death, at death or afterwards.

A living trust is a legal arrangement through which one person (or an institution, such as a bank or law firm), called a “trustee,” holds legal title to property for another person, called a “beneficiary.”

A will covers any (and only) property or assets that is your name when you die. It does not cover property held in a living trust or joint tenancy.  On the other hand, a living trust only covers property or assets that has been transferred into the living trust. In order for property to be included, it must be put in the name of the living trust.

Another difference is between wills and living trusts is that a will passes through probate. In other words, this means a court of law will oversee the administration of the will. Probate ensures that the will is valid and that any property (or other assets) are distributed appropriately. A living trust passes outside of probate (e.g. a court does not oversee it). This can save you time and money as beneficiaries may gain access to these assets more quickly. Also it is important to remember that wills are public record while living trusts remains private.

It is important to know the differences between living trusts & wills.

Do I Need A Will? How About A Living Trust?

Wills

The average American is living longer. Even with great medical advances, there are still are still things that will happen. You will always pay taxes and one day you will die. Therefore everyone needs a will.  A will is one of the most important things you will do for yourself and your family. A will is designed to ensure that your assets are distributed to whomever and in the amount and manner that you choose. There are also other functions including guardianship and appointing an executor. A will can be drafted for a relatively a lost cost of $200 to $300 dollars.  A will is well worth the investment.

Additionally, while you’re talking with your attorney, it’s a smart idea to discuss related issues — power of attorney or advance healthcare directive. These are important considerations in the event you are disabled but not dead, having to deal with heroic medical efforts. It can ease the burden for you and your families. It is important to know the differences between living trusts & wills.

Living Trusts

Living trusts are not for everyone, but is a useful estate planning tool for many people. The expenses associated with opening a living trust are $3000 to $5000. Living trusts are ideal for those with substantial estates or net worth (at least $250,000 or so) or with those who have vast amounts of real estate.  A living trust is simply an agreement between the grantor (the person who establishes and funds it) and the living trustee, who administers it to the beneficiaries. When someone with a living trust dies, he/she can leave all their assets to the living trust. Assets are doled out by the trustee.

We created a living trust about 5 years ago. Today, we have very specific instructions for how and when we want our estate distributed amongst our family, specifically our kids.  We also include have people identified who will make decisions on our behalf if we are unable to (e.g. medical decisions) and also have a separately identified a trustee to manage the living trust’s assets. It is important to know the differences between living trusts & wills.

Estate planning takes work and time in planning and preparation. Today we use a estate planning professional to help us. They have followed us as our lives continue to evolve and change. It is an area that is well worth the investment! 

Remember that life is a game never won or lost, only played.