Wills vs. Trusts: What’s the Difference?
A will and a living trust are both important pieces to your estate plan. However, they are different documents and it’s important to understand those differences when making decisions on the distribution of your estate.
The main purpose of a will is to designate beneficiaries you want to inherit your property and for you to determine a guardian for your minor children. A will can be created by an individual or a married couple through a coordinated effort. A simple will can accomplish many of your estate planning goals, including the following:
Designate a beneficiary to inherit all of your property, whether that person is your spouse, your children or another individual of your choosing.
Nominate an executor (the person in charge of settling your estate). You may also nominate an alternate executor, who would take over responsibilities of settling your estate should your executor pass before you.
Determine what happens if one partner passes away first or both pass at the same time.
Nominate a guardian for your children (you may also nominate an alternate guardian).
Create a trust or custodial account for your children. This allows you to set money aside for your minor children until they become a certain age.
Set money aside to care for your pet and also name a caretaker for them.
A living trust on the other hand, creates a legal entity of sorts to protect your assets from probate. With a trust, your property is transferred into it and you may designate how that property gets distributed upon your passing. Other benefits include:
Avoiding probate. This is basically the main purpose of a trust, as the probate process in California is expensive and time consuming. A trust shields your property from the probate proceedings and allows your trustee to settle your estate without getting the courts involved. A will is subject to probate before the assets can be distributed to the beneficiaries.
Privacy. A will is a public document that needs to be filed with the court. A trust remains private.
Allows your trustee to easily manage your assets should you become incapacitated or pass away. The trustee is obligated to manage the trust according to your benefit while you’re still alive and to the benefit of your beneficiaries upon your passing.
A trust is flexible and can be customized to fit your family dynamic. For example, if you have a child with special needs, you can designate how to handle the care for the child and set aside money for their care. A trust can also help minimize estate taxes and is the perfect document for blended families.
So, the question remains, who needs a will and who would be better served by creating a trust? A will can be the the right choice if you do not own any real estate, you have minor children and you want to name a guardian immediately, you like the courts and want to go through probate regardless of the costs or if you have complicated creditor issues that a court needs to sort out. Keep in mind that all estates valued at more than $150,000 automatically go through probate without a living trust. On the other hand, you will benefit from a trust if you own a house in California, or are in the process of buying one, if your total assets exceed $150,000 (some assets automatically have a beneficiary designation which makes a will/trust moot. For example, retirement accounts). Also, if you have more than $5 million in assets, you will definitely need a trust with a tax plan. Finally, if you are part of a blended family, own complex assets (like a business), or have children with special needs, you should have a living trust created.
The reality is that a will and a living trust both have their benefits and should be created together to offer the most protection of your assets and ensure that your estate is settled according to your wishes when the time comes. In the next post, I’ll discuss the drawbacks of going through the probate process and how to avoid probate all together. Thanks for reading. And don’t forget to reach out and sign up for your initial consultation!
