You’ve worked hard for your money and have been a conscientious saver. It’s only natural that your assets are distributed as you’d like them to be when you pass away. Sure, you may not consider yourself wealthy. But even if you’re a person of modest means, you still have an estate.
You may have thought that “estate planning” was only for millionaires and celebrities. But just like life insurance, everyone should have an estate plan. The best estate plan for you is going to depend on your circumstances. For some, a living will suffice, and no trust is necessary. For others, a trust can be helpful.
What should you do?
In this article, we’re going to help you decide by answering four questions:
- What is a living trust, and how does it work?
- What is a living will, and how does it work?
- What are the key differences between them?
- How do I decide what I need?
Since you don’t know when you’re going to pass away, and your estate will need to be settled, there’s no time to waste. Let’s get started.
A living trust is a legal document that places your assets — bank account, real estate, investments, vehicles, and your valuable personal property — in a trust for your benefit while you’re alive and spells out where you want all of these things to go when you die. If it’s a revocable trust, you can change or cancel it anytime during your lifetime. If it’s an irrevocable trust, what’s done is done and can’t be changed.
With a living trust, you name yourself as the trustee, and if you’re married, your spouse can be the co-trustee. You remain in complete control of your assets, moving them in and out of the trust when you wish. You’ll also name a “successor trustee” who, upon your death, will transfer your assets to your beneficiaries according to your wishes.
If you become incapacitated, your successor trustee takes over and handles financial issues and can even manage business interests or property for you. Everything is spelled out in a living trust and, unlike a will, requires no involvement by the courts.
To realize the benefits of a living trust, you need to put your assets into it. This means your property must be re-titled and your accounts put in the name of the trust. You must be sure to do this yourself or have your attorney take care of it.
A “pour-over will” is also often used with a living trust. This states that the assets you haven’t already placed in the trust should be included at your time of death.
[ Related read: What are the different types of life insurance? ]
A living will, also known as an “advance health care directive,” is a legal document specifying what medical care you wish to receive should you become incapacitated and can’t make decisions for yourself. They’re primarily for spelling out your wishes for end-of-life medical care, including under what conditions to prolong your life through life-sustaining treatments or life support devices. Many people who have a terminal illness create a living will to avoid placing an unnecessary burden on their families.
The terms of your living will and when it goes into effect are set by you. For example, you might specify that the information contained in your living will is going to apply if you’re in a vegetative state or a coma, but not if you have Alzheimer’s disease or you’re terminally ill.
Living wills are helpful for situations that happen over more extended periods, such as when to treat an illness with powerful pain medication or deciding when to have surgery. When emergency medical care is needed, a doctor may have to make quick decisions about your care without having time to talk with your family and determine if you have a living will. To keep this from happening, inform your health care providers in advance that you have a living will, and make sure they have a copy of it.
Many people confuse living trusts with living wills because they sound so much alike, and they’re both used as estate planning tools. But, they serve two entirely different purposes. A living trust covers a few phases of your life, whereas a living will only covers what happens if you’re incapacitated.
An important difference between a living will and a living trust is the probate process. Property that was owned by a living trust avoids probate. The significant disadvantages of probate are the cost and the delay it causes with estate distribution. In some states, it can be expensive even for small estates to go through probate.
Cost is also a consideration and major difference between the two. A will is usually less expensive to have prepared than a trust.
Some attorneys believe that people are less likely to update their trust, as opposed to updating their will. Many people think, in error, that once a trust is created, it doesn’t need to be revisited.
[ Related read: 3 financial considerations when caring for aging parents ]
There are many positive reasons to establish a trust, but don’t overlook the fact that it involves more upfront expense and effort. To decide if you should put in the extra effort and cost associated with a trust, see if your state has a simplified or expedited form of probate for estates under a specific dollar amount. If you reside in a state where the probate process isn’t burdensome or complex, just having a will may suffice.
Experts recommend that you use professionals to create your living will and/or living trust. A team approach to drafting these documents that includes you, an estate planner, and an attorney specializing in estate work will help you decide what you need.
Remember, when it comes to estate planning, one size doesn’t fit all. What’s suitable for someone else may not be right for you. Your estate plan should be prepared to best meet the needs of you and your family.
Having grown up in upstate New York, Bob Phillips spent over 15 years in the financial services world and has been making freelance writing contributions to blogs and websites since 2007. He resides in North Texas with his wife and Doberman puppy.
The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.