Will vs. Living Trust: Which Is Best for Your Estate Planning?

A trust is a legal arrangement in which someone, known as the grantor, transfers control of estate assets to the care of another individual or entity, known as a trustee. Grantors and trustees have a fiduciary relationship, meaning the trustee is obligated to manage trust assets in the best interests of the trust's beneficiaries.

A trust is created first on paper using a legal document, then "funded," which simply means transferring property or other assets to the control of the trustee. For example, if you plan to transfer real estate to the trust, you'd need to execute new property deeds naming the trust as the owner.

What assets can be held in a trust?

You might choose to place all of your assets in a trust or just some of them. Assets that you might transfer to a trust include real estate, bank accounts, investment accounts, individual stocks and bonds, artwork, antiques, and other assets of value. Intellectual property, such as copyrights, may also be transferred to a trust.

Assets that you would generally not place in a trust include ones that already have a named beneficiary. That means things like a 401(k) plan, Individual Retirement Accounts (IRAs), or Health Savings Accounts (HSAs). Whether you can remove assets from a trust after the transfer of ownership depends on the type of trust you've created.

There are four major types of trusts:

• Living trusts
• Testamentary trusts
• Revocable trusts
• Irrevocable trusts

Living trusts take effect as soon as they're created, while testamentary trusts only take effect upon the trust-maker's death. A revocable trust can be changed at any time during the grantor's lifetime. Upon that person's death, the trust becomes irrevocable. Irrevocable trusts are permanent, meaning no further changes are allowed.

What is a living trust?

A living trust is a type of revocable trust used in estate planning that allows you to manage assets during your lifetime and beyond.

When you establish a living trust, you can act as your own trustee or name someone else to assume that role. If you choose to serve as trustee, you can specify in the trust document who should succeed you if you pass away or become incapacitated.

Living trusts can meet a variety of needs within an estate plan. For instance, they allow you to:

• Specify what terms, if any, designated beneficiaries must meet in order to receive their inheritance
• Preserve assets for the care of minor children or adult children with special needs
• Give directions for the management of your assets if you're unable to oversee them yourself because you've become permanently incapacitated by an illness, injury, or disability
• Create a legacy of giving by naming one or more charities or non-profits as beneficiaries to a charitable remainder trust

Trusts can also allow heirs to avoid probate, a legal process that can be time-consuming and costly. Probate is a court-supervised proceeding in which a deceased person's estate assets are inventoried and liquidated to pay any outstanding debts, with any remaining assets distributed to their heirs.

When properly funded, the trust property is not subject to probate. Avoiding probate court can save money on legal and court fees, keep the deceased person's estate inventory out of the public record, and accelerate the time frame in which beneficiaries are able to access their inheritance.

Key differences between wills and trusts

Wills and trusts differ in several respects with regard to how they're created and what they're meant to be used for within an estate plan. Comparing them side-by-side can make it easier to understand what role each one is designed to play in estate planning.

In terms of disadvantages, wills can be challenged after a person's death, which can add a wrinkle to the disposition of their estate. Trusts, meanwhile, can be costly to set up and maintain for people with complex estates. A revocable trust wouldn't offer any protection against creditor lawsuits either, as the assets in the trust technically still belong to you.

The role of the probate court in estate planning

When someone dies, what happens next depends on whether they have a will, trust, or both in place.

If they have a will and they've named an executor, that individual can then submit an application to the probate court to start the probate process. An executor is someone appointed by the testator or willmaker to enforce the terms of the will. If there is no executor named in the will or no will at all, then anyone can petition the probate court to be appointed to the role.

Once probate is underway, the executor has certain duties they're responsible for carrying out. Those include inventorying all of the deceased person's estate assets, notifying creditors of their death, liquidating assets if necessary to pay outstanding debts, and paying estate taxes or other required taxes. They also distribute assets to designated beneficiaries or heirs. State laws can permit executors to collect a fee from the estate for handling those duties.

The amount of time probate takes to complete depends on the estate in question. A large or complex estate can take longer to finalize, and there can also be delays if one or more of the deceased person's family members decide to challenge the terms of the will. The probate court would need to hold a hearing to determine whether those challenges are valid.

Transferring assets to a trust, meanwhile, allows heirs to avoid probate and its associated drawbacks. You can not only protect assets, but you also get the benefit of privacy since trust terms do not have to be entered into the public record.

Can a living trust avoid federal estate tax?