Make a plan for your heirs.
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Estate planning isnât just for the uber-wealthy. In fact, if you have any property or assets at all, it probably makes sense to create a will or a living trust to ensure that your wishes are followed after you pass on.
But deciding on a will versus a living trustâlike all estate planning decisionsâcan be overwhelming. Thereâs different terminology to understand, and different structures that can be confusing at first. And then thereâs the facing-your-mortality aspectâthere are few things in life less pleasant than that.
But when structured properly, wills and living trusts can give you control of your assets, tax efficiency, and, hopefully, peace of mind as you navigate your later years. Hereâs what you should know.
Key Points
- A will is a relatively simple document that outlines how you want your assets to be taken care of after you die.
- A living trust is a more complex legal arrangement in which you transfer ownership of your assets to another entity to be managed according to your wishes.
- Itâs possible to create a testamentary trust that puts your assets into a trust after you die.
Will vs. living trust: An overview
Before making a decision about whether to use a will or a living trust, itâs a good idea to understand the difference between these two estate planning tools:
- Will. A will is a relatively simple document with instructions on how to distribute your property and assets after your death. A will is usually subject to probate, which is the stateâs process of reviewing assets and property and administering the transfer of those assets to heirs and beneficiaries.
- Living trust. A living trust is a separate legal entity designed to hold property and assets; it is set up while you are alive. When you create a living trust, ownership of your assets passes from you to the living trust. These are more complex arrangements that have the potential to avoid probate, depending on how the living trust is structured.
Itâs important to note that even though there are differences between wills and living trusts, both of these estate planning instruments are governed by state law. Before using a will or a living trust, you should familiarize yourself with the rules as they apply to your state. If youâre unsureâor if your estate has any complexitiesâyou should probably consult with an attorney or estate planning professional. They can help you understand the pros and cons of a will versus a living trust (see more below) as they relate to your circumstances, and they can draw up the necessary documents.
Some assets transfer directly to beneficiaries without a will or living trust.
If you have a retirement plan or life insurance, you have already declared beneficiaries on those policies. When you die, these accounts will automatically transfer to your listed beneficiaries and will not be subject to probate.
Key differences between a will and living trust include:
- Ownership of assets. With a will, you still own the assets until you pass and theyâre distributed to your heirs and beneficiaries. When you use a living trust, the living trust owns the assetsâyou donât. The assets are managed on behalf of the beneficiaries, which can include you during your lifetime and your heirs after you pass.
- Taxes. A will doesnât stop your estate from being subject to estate and inheritance taxes (when applicable). Certain types of living trusts, however, can provide a shelter against specific taxes after you pass, smoothing the way to pass your assets on to your heirs without greatly diminishing the value of your estate.
- Ability to change. Wills are relatively easy to change. You can update your will throughout your lifetime with a minimum of fuss. In contrast, living trusts can be difficult to update. Even a revocable living trust, which can be changed while youâre alive, is often harder to change than a will. An irrevocable trust is practically impossible to change once put into place.
- Cost. Because of their relative simplicity, wills are usually inexpensive to create. Some lawyers offer affordable will packages. You might even be able to create your own willâfree or at a nominal costâthrough an online template. Living trusts are more complex and therefore more expensive to create. On top of that, there are ongoing costs associated with managing a living trust.
Revocable vs. irrevocable trust
Testamentary trust. Another estate planning option is the testamentary trust. This is a trust created by a will. You might direct that, upon your death, a trust is created and your assets be put into this trust. That way, after you die, your assets will be managed on behalf of your beneficiaries, without the property going directly to them. If you have minor children, or if you have adult children with special needs who are unable to manage their own affairs, a testamentary trust might make sense.
Tax benefits of a living trust vs. will
Itâs important to be clear about your goals.
Some people like the potential tax benefits of living trusts. An irrevocable trust can shield included assets from estate taxes. However, if you create an irrevocable trust, you have to give up control of your assets. You canât help manage them, even if youâre a beneficiary.
A revocable living trust can make it easier compared to a will to pass your assets on to your heirs without probate, but they usually donât come with tax benefits that shield you from estate taxes.
With a will, there are no tax benefits. However, the federal government and many state governments have high exemptions. For example, in the U.S., the federal estate tax exemption in 2023 is $12.92 million. Unless your estate is worth more than that, you donât have to worry about federal estate taxes. States have their own exemption levels, and most donât even levy an inheritance tax.
Costs of setting up a living trust vs. a will
Before you decide to create a living trust just to avoid probate, itâs important to consider the costs involved.
In general, wills are somewhat inexpensive. In fact, in many states, you can create your own will free of charge. A simple declaration of what you want to have happen after you die is often recognized by most states as legally binding. However, your will is subject to probate and interpretation by the state.
Even if you decide to have your will drawn up by a professional, it will still cost much less than a living trust. The complexity of a living trust usually means increased expenses. On top of that, a living trust is managed by one or more trustees, who typically receive ongoing compensation for their servicesâunless, of course, you opt to act as your own trustee. And if you ever need to make changes to your living trust, it will cost more than changing a will.
What are the pros and cons of a will versus a living trust?
Will| Pros | Cons |
|---|
| Provides a way for you to let your heirs know how to handle your estate. | Doesnât provide a shield against estate taxes. |
| May be created for free or at a low cost. | Requires a probate process through the state. |
| Easy to change over time. | Contents of the will become public record. |
| Simple structure thatâs easy to understand. | Creditors can still claim assets after your death. |
|
Living trust| Pros | Cons |
|---|
| Some types of living trusts provide tax shields. | An irrevocable trust is almost impossible to change. |
| Some living trusts protect assets from creditors. | Living trusts can be expensive to set up. |
| Assets usually pass without probate. | You give up ownership of the assets held in the living trust. |
| Terms of the living trust might be kept private. | You need to choose the correct living trust for your needs or you might not get the benefits you want. |
|
The final will-versus-trust decision is based on your specific needsâyour assets, your heirs, the complexity of your estate, and more. A will is often sufficient for most people who have small estates. However, if youâre concerned that the value of your assets and property will exceed estate tax exemptions and you want to reduce taxes, an irrevocable trust can be a solutionâas long as youâre willing to give up some control over your assets.
Carefully consider your needs, enlisting the help of an estate planning specialist, and remember that you can have both a will and a living trust to ensure your wishes are carried out after your passing. And once youâve set your plans in place, be sure to communicate your estate plan wishes with your loved ones. Itâs best to have open and honest end-of-life discussions while youâre healthy, so there are no surprises later.
This article was most recently revised and updated by Miranda MarquitThis article was most recently revised and updated by Nancy Ashburn
