When you pass away, you leave behind an estate composed of your real property, personal property and other assets. Unless you leave instructions defining how these assets should be divided and amongst whom, the state decides which of your relatives will inherit your property. You probably don’t like the idea of leaving your estate up to chance, but choosing the right plan for your estate is confusing. Understanding the difference between a will and a living trust and comparing the benefits and drawbacks of both options can help you make a better, more informed decision and establish the estate plan that works best for your personal needs.
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Advantages of Last Will
A last will is the most basic way to plan an estate. A will is very simple to establish, and a testator can draft his own will with little to no up-front costs. Wills offer a lot of flexibility for a testator who has a spouse, minor children or others for whom he wants to provide support after his death. Same-sex partners and unmarried couples can also use a will to grant rights and provide financial support to their loved one where state law normally would not. In this regard, a will allows the testator to plan for more personal matters, such as funeral arrangements, how his children should be raised, care for his surviving pets or anything else the testator could need.
Advantages of a Living Trust
A living trust offers many of the same benefits as a will, but allows the testator to protect her financial privacy by completely avoiding probate. While a will becomes a part of public record during probate, only the beneficiaries of a living trust know how much revenue the trust generates, and only the trustee knows the full extend of the trust’s assets. Living trusts offer more control over the estate’s assets, allowing the testator to form a living trust to better handle her assets, investments and interests, control her business interests and manage her real property during her life, and then pass this authority onto a new trustee after her passing. Living trusts also avoid traditional estate taxes, saving more money for the decedent’s beneficiaries. Moreover, the decedent can establish a living trust during her lifetime, allowing her to take advantage of these same tax breaks while still alive.
Disadvantages of Last Will
In exchange for the flexibility a last will offers, the testator’s estate incurs federal estate tax liability. The testator’s beneficiaries also face income taxes and inheritance taxes, depending on their residential state’s laws, while the inheritance received from a living trust is usually only subject to income taxes and only on income received for the fiscal year. While probate does extend protection against fraud, embezzlement and mismanagement of estate assets, the testator’s will becomes public record once filed. This allows the public to access and review the testator’s will during and after probate. Probate also opens the possibility for challenges against the validity of the will or the testator’s capacity, which possibly can overturn the will and potentially subject the entire estate to intestacy probate.
Disadvantages of a Living Trust
Compared to a will, a living trust is very limited in application. Living trusts can manage and pass on real property, but the decedent cannot arrange care for minor children, grant rights to her unmarried partner, plan her funeral or make other arrangements. Without a will, a living trust leaves the majority of the testator’s personal matters for intestacy probate. Additionally, living trusts cost substantially more to establish because the testator must fund the trust at the time she forms it. Further, while a living trust allows the estate to avoid probate entirely, the court has no way to monitor the estate for potential fraud or abuse and far less opportunity to catch administrators who misappropriate the estate’s assets.