What Is Better: a Living Trust, or Will?
A will and a living trust work hand in hand, and both are essential pieces of most good estate plans. Fortunately, you don't have to choose between a living trust and a will. Both serve their own purpose, and if drafted correctly, they can work together to create a seamless estate plan.
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Probate
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To understand why you typically want both a will and a living trust, you must understand the term probate. Probate is the legal process by which a will is given effect. In other words, when you do, a probate court will review your will, interpret its provisions, and order your personal representative to distribute your estate according to the terms of your will. Probate is sometimes relatively simple, but it is often time-consuming, complex, and expensive.
Living Trust
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One way to avoid probate is to create a living trust. A living trust is a legal relationship involving you (the trustor), a trustee, and one or more beneficiaries. When you create a trust, you transfer property to the trust and the trustee then manages that property and pays money out of the trust to the beneficiaries, all according to your instructions in the trust document. When you die, the trust continues to exist and since the trust owns the property, whatever property is in the trust does not have to go through probate.
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Will
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Unlike a living trust, a will is meaningless until you actually die, at which point it becomes critically important. For parents, one of the most important aspects of a will is the appointment of a guardian for your minor children. For everybody, the will is important because it describes who inherits your money and property. If you don't have a will, your kids and your property will be dealt with according to state law, which means you don't have any say in the matter.
Wills and Trusts Working Together
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A will and a trust can work together in a good estate plan. The will can provide that any property in your estate at the time of your death automatically becomes a part of the trust as soon as you die. For example, you probably don't want to transfer your cash and personal bank accounts to the trust, which means they will pass according to the terms of your will. Your will can "pour over" to your trust, and since you set the trust up while you were alive, you can control how the trust manages the property.
Other Trust Advantages
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The living trust is advantageous for reasons beyond just avoiding probate. A properly drafted trust can help minimize taxes, and it can help bolster investment income. To reduce taxes, you can transfer income-producing property, such as investment accounts or rental property, to the trust, which means the trust is taxed on the income instead of you being taxed personally. If you are in a high tax bracket because of your other income, this means your trust will get taxed in a lower tax bracket, resulting in a net tax savings. You can also increase the earnings on the trust property by appointing a professional trustee, such as a bank or attorney, to manage and invest the trust property. Professional trustees can often produce better returns than you could on your own.
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