Living Trusts vs. Wills and Estate Planning
Estate planning is the process by which a person decides how to distribute and maintain control over her property when she dies. Two devices used in estate planning are trusts and wills. Choosing the right device depends on your financial situation and how you want your property to be dispersed when you die. Understanding some of the pros and cons of a will or trust can help you make your ultimate decision.
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Traditional Estate Planning: Use of a Will
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Trusts are a relatively new device in estate planning. That is, traditionally, most people chose to use a will to distribute their assets upon death. A will is a legal document that takes effect when the person who wrote it dies. The will contains instructions about who will oversee the administration of the account (the "executor" or "personal representative") and how the property will be divided upon death.
Pros and Cons of a Will
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According to the All Law website, wills are relatively simple to create and require minimal maintenance once written. State law allows any competent adult who understands the nature and disposition of his property to write a legally binding will. For small estates, a will is often the most viable option as they are inexpensive to draft and maintain and the formal process of dividing assets does not take much time.
The downside of a will is that it must be put through the probate process. This means that the personal representative named in the will must petition the court to open the decedent's estate and file documents such as inventories of property with the court. The will itself becomes public record. Probate also costs money and, due to the slow nature of the judicial process, the matter may take months or years to resolve.
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Explanation of a Living Trust
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Unlike a will, a trust is a separate legal entity. A living trust is one set up during the lifetime of the "grantor." One common image of a living trust is an empty room that can be filled with the grantor's property. The grantor must create a document called a "declaration of trust" that sets forth the instructions for how the trust operates. During the lifetime of the grantor, the grantor is both the trustee (the person who oversees how the property is handled) and the beneficiary (the person who receives the benefit of the property). Living trusts can be revoked and modified over the lifetime of the grantor. When the grantor dies, successor trustees and beneficiaries named in the declaration of trust come into effect.
Pros and Cons of a Living Trust
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The most commonly cited advantage of a living trust is that it allows the grantor to avoid probate. When the grantor passes away, nothing needs to be filed with the court to distribute the decedent's assets. Instead, the trustee follows the instructions set forth in the declaration of trust. The trust also protects privacy in that it does not become part of the public record.
Trusts can be expensive to set up and maintain, however. To fund the trust, legal title to the property must be physically signed over to the trust itself. Additionally, most individuals need a will to complete the estate plan even with a living trust. A "pour-over will" is a will that gifts all property to the trust upon death. Trusts do not allow for designations of guardians of minor children. If the grantor has minor children, a supplementary will naming a guardian is needed.
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