Both living trusts and wills are legal instruments used to transfer property or assets from one person to another. However, there are some major differences between a living trust and a will.
First, living trusts can take effect while the trustor, the owner of the property that goes into the trust, is still living. That is the property transfers to a trustee, who holds it in trust for the beneficiary. All this occurs while the trust creator is still living. The law of trust also allows the creator to revoke the trust, take their property back, and cancel the trust.
In comparison, wills go into effect only when the testator, the person who made the will, passes away. After a testator’s death, their will enters the process of probate, which is a legal proceeding. An administrator manages the property bequeathed in the will until certain tasks are completed, and the property is distributed to the will’s beneficiaries, the people or entities to whom the testator bequeathed the property.
A will becomes final when the testator of the will passes away. However, a person who has made a will can always change it before they pass away as long as they are still mentally competent.
What Is a Living Trust?
The person who establishes a trust is a “grantor” in legal terminology. A grantor may create a revocable living trust, or inter vivos trust, while they are alive. The grantor can also modify or completely revoke a living trust while they are still alive. However, the trust becomes irrevocable or no longer subject to modification or revocation upon the grantor’s death.
The grantor may serve as the initial trustee or choose another person to serve in that role. The grantor can transfer property into and out of the trust during their lifetime. The trustee manages the property in the trust for the benefit of the people or entities, e.g., a charitable organization, named as beneficiaries in the trust document.
What Are the Advantages of a Living Trust?
The advantages offered by a revocable living trust are as follows:
- The probate process is avoided for the assets held in the trust when the trustor passes away. The trust assets can be distributed immediately. A will known as a “pour-over will” can provide that any of the grantor/trustor’s assets that have not been transferred before the death of the grantor/trustor can go into the trust after the grantor/trustor’s death;
- It minimizes the value of the trustor/grantor’s estate. This minimizes the taxes that must be paid on the estate. Transfer of assets into a trust is not a taxable transaction. But the assets in a person’s estate are subject to taxation;
- It ensures financial privacy after the death of the trustor. A will must be probated, which is a public legal process. Trusts can operate without being made public;
- A revocable trust allows its trustee to manage assets if the grantor becomes unable to do so;
- It is less expensive to create than many other types of trusts;
- In community property states, the inheritance provided through a trust is the separate property of the beneficiary. It does not become part of a couple’s community property unless the beneficiary specifically makes it so. So the trustor can pass property to a child exclusively as their separate property;
- It allows the grantor to control how and when beneficiaries receive their inheritance.
What Are the Disadvantages of a Living Trust?
The disadvantages of a living trust are as follows:
- A revocable living trust does not protect the trust assets from the grantor’s creditors. Because assets remain available to the grantor, they can also be accessed by the grantor’s creditors to pay the grantor’s debts;
- A revocable trust may interfere with the grantor’s ability to get help with long-term care expenses from Social Security and Medicare if they need it.
A type of trust that is easy to establish is the Totten trust. To set up a Totten trust, a person must deposit money into an account or a certificate of deposit in a financial institution. The grantor then titles the account with the words “in trust for,” “payable on death to,” or “as trustee for,” a named beneficiary.
The trustor can transfer the account as a gift during their lifetime. Or, the asset transfer to the beneficiary can be completed when the grantor passes away. Then the beneficiary can access the trust assets. The advantage of a Totten trust is that it avoids probate, which is necessary for assets transferred by a will. It also avoids gift tax.
When Should a Will Be Used Instead of a Trust?
People who need to distribute property after death have a choice among several legal instruments, including living trusts and wills. Here are some points a person should consider when arranging for a transfer of property upon their death:
- Trusts are often used when the trustor wants to place conditions on transferring property to another. For example, an asset can be placed in a trust for the beneficiary. The trust document can provide that the beneficiary may receive the property once a certain condition is met, e.g., the beneficiary reaches an age at which the trustor believes they will be mature enough to use the money wisely or when the beneficiary completes their college education;
- With a will, the testator’s property must go through the probate process. Transferring property before death through a living trust is a way to avoid the probate process.
How long the probate process lasts depends on several factors. One of them is the size of the estate, i.e., how much property is in it and what the character of the property is. If a person’s estate is not large and not complicated, probate may well not be such a burden. If the heirs of the testator are not likely to need to receive their inheritance immediately, probate is not a significant problem.
Lastly, there are various procedures for amending wills and trusts. For instance, they generally need to be signed and witnessed by two uninterested witnesses. Thus, it is possible to change or amend a will during the testator’s life. This is common for major changes in the lives of the testator and their heirs, such as marriage, divorce, remarriage, childbirth or adoption, and the like.
Trust and will contests can often prolong or delay the distribution process. Thus, it is important that a person is as clear as possible when expressing their intentions in a trust or will document.
There are many different kinds of trusts with a variety of features. And as we can see from the characteristics of a pour-over will, wills and trust can be related. A person may want to use a coordinated combination of both to achieve their specific goals.
Another factor that needs to be considered is the character of a person’s assets and tax law. A person might want to make certain provisions for transferring a 401K plan or a Rollover IRA and different provisions for their real estate or collection of priceless artworks.
The best approach would be to consult with an experienced trusts and estates attorney for expert advice as to which trust is the best for the person’s goals and, better yet, a complete estate plan. A lawyer should be able to devise a plan for all of a person’s assets and would probably use a combination of a trust, will, and other possible strategies.
Do I Need a Lawyer for Help with Trusts or Will Documents?
Transferring property through a trust, a will, or some available alternative can involve several considerations. You may need to consult a living trust attorney for guidance in devising a complete plan and drafting the legal documents to put it into effect.
An experienced lawyer near you can also ensure that your heirs do not end up in legal conflicts in the future regarding your property.
