Both living trusts and wills (also called last will and testament) are legally binding documents used to distribute assets in your estate to beneficiaries after your death. However, they differ in cost, content, execution, and the timing in which they become effective.
You might wonder: should I have a living trust, a will, or both? In this guide, we’ll explore living trusts and wills in detail with tips from attorney Susan Chai Esq., providing valuable insights to enhance its credibility and usefulness.making it easier for you to decide what’s best for your situation.
What Are They?
While both a living trust and a will are important for a solid estate plan, they do have distinctive attributes and characteristics. Feel free to skip this section if you’re already familiar with both.
What Is a Living Trust?
A living trust is a legal arrangement created during your lifetime to hold and manage your assets and detail how your assets will be distributed after your death. You transfer your assets into the living trust while you’re still alive, making the living trust the new owner of your assets. Then, you can either manage the living trust yourself or assign an individual or entity, known as a trustee, to manage on your behalf.
Living trusts can either be revocable — meaning that they can be modified or terminated by the creator (a grantor) at any time — or irrevocable, meaning that they cannot be altered once created.
► READ MORE: How to Set up a Trust: Steps, Costs, and More
Below is a concise list of pros and cons associated with living trusts:
Pros
- Avoids probate
- Maintains privacy
- Becomes effective as soon as established
- Reduces likelihood to be contested in court
- Allows for detailed control over when and how your assets are distributed
- Authorizes management indefinitely
Cons
- Can be expensive and complex to set up
- Requires ongoing management
- Cannot designate guardianship
Types of Trusts
Apart from living trusts, many other types of trusts are applicable for various purposes and assets. One of the more common ones is a testamentary trust, which is established through your will and only takes effect upon your death.
What Is a Will?
A will, or a last will and testament, is a legal document specifying how your estate and affairs will be handled after your death. This includes appointing an executor to ensure your matters are settled according to the terms stated in your will, distributing assets to beneficiaries, and designating a guardian for your dependents (if any). Some also include details for funeral arrangements and plans.
Will vs Living Will
Don’t confuse a will with a living will. While a will outlines asset distribution and dependents’ guardianship after your death, a living will specifies your medical care preferences if you become unable to communicate your decisions. They serve different purposes in estate and health care planning.
A will must be authenticated through probate court to be effective. You can revoke or amend a will at any time after its execution, provided you’re mentally competent.
Below are some advantages and disadvantages to consider when looking into wills:
Pros
- Generally simpler and more cost-effective to create
- Allows for designation of guardians for minor, dependents, and even pets
- Can be easily modified
- No need to transfer assets
Cons
- Has to go through probate
- Becomes public record
- Offers limited control over assets
- May be more likely to be contested in court
- Activates only post-death
- Authorizes management only until probate ends
Living Trust vs Will: 9 Key Differences
Now that you know how these two estate planning options work, let’s unpack the main differences between a living trust and a will.
1. Scope
- Living trust: Manages distribution of assets in the trust only.
- Will: Directs entire estate distribution and guardianship.
A living trust focuses explicitly on the distribution of assets that are transferred into the living trust, such as a piece of property, a vehicle, and cash.
On the other hand, a will directs the distribution of nearly everything held in your estate and handles additional aspects, including guardianship of your dependents. It’s important to note that one generally doesn’t replace the other.
2. Setup Efforts and Costs
- Living trust: More effort, higher cost ($1,500-$2,500), asset transfer required.
- Will: Less effort, lower cost (~$300), DIY option available.
Setting up a living trust generally requires more effort compared to a will. Initially, it requires a transfer of your assets into the living trust, which can incur additional administrative costs and entail a more cumbersome process.
Due to its complexity, many individuals opt for legal assistance, with the average fees for setting up a living trust ranging from $1,500 to $2,500, depending on the complexity of your estate.
On the other hand, establishing a will is a more straightforward affair. The average attorney fees for drafting a will is around $300. There are even online guides and templates that help you create a will on your own, which can significantly reduce the setup cost.
3. Effectiveness Timeline
- Living trust: Immediate, ongoing asset management; useful for incapacity.
- Will: Active only after death; executor’s role ends post-probate.
A living trust becomes effective as soon as it’s signed and properly funded, granting an immediate framework for managing one’s assets. The trustee’s role is ongoing, providing a continuous management mechanism.
Living trusts are especially useful if the grantor becomes incapacitated or wishes to step back from active management of the assets.
On the contrary, a will only springs into action upon your death. The executor named in the will is entrusted with the responsibility of managing and distributing the assets per the will’s instructions. However, this management ceases once the probate process concludes, marking a distinct endpoint to the executor’s role.
4. Ownership
- Living Trust: Grantor loses ownership upon transfer to trust.
- Will: Testator retains ownership until death.
Setting up a living trust means transferring ownership of your assets to the living trust itself. If you transfer your home into a living trust, then the living trust owns the house, not you.
Accessing certain assets could cause issues since they are no longer under your direct ownership. For instance, selling or refinancing properties in a living trust could require additional steps compared to assets owned outright.
In contrast, drafting a will merely involves naming beneficiaries for your assets without any actual transfer occurring until after your death. This allows you to continue using and accessing those assets freely during your lifetime.
For example, if you name a beneficiary for your car in your will, you can continue to use it as you wish, without any extra steps or considerations, until it is transferred to the designated beneficiary upon your death.
5. Maintenance
- Living Trust: Requires active management, updates, potential trustee fees, and tax filings.
- Will: Low maintenance, no active management or costs.
Maintaining a living trust often requires a more hands-on approach and a budget for management. For instance, you may need to continually update the living trust as you acquire new assets or your circumstances change.
Additionally, if you have a trustee managing the living trust, management fees may be involved. Furthermore, should your living trust generate income, it may require a separate tax return, adding to the administrative burden.
On the contrary, wills are relatively maintenance-free once properly drafted and signed. They don’t require ongoing management or incur additional costs. Unlike living trusts, they don’t hold assets, generate income, or require active management during your lifetime.
6. Flexibility
- Living Trust: Limited flexibility, especially if irrevocable; modifications involve administrative actions and costs.
- Will: Greater flexibility; can be easily amended with a codicil.
Living trusts, particularly irrevocable ones, have limited flexibility once established. Even for revocable living trusts, modifications may require additional administrative actions such as re-titling assets or consulting with an attorney, which could incur more costs and effort.
Wills, however, offer greater flexibility as they can be easily amended whenever circumstances change. A codicil, a document used to alter an existing will, can be drafted to reflect new wishes.
7. Taxes
- Living Trust: May reduce estate tax by excluding assets from the estate, but can be tax complex.
- Will: No tax shelter; estates over Federal Estate Tax Threshold subject to 18-40% federal estate tax.
If your living trust is irrevocable, you may be able to enjoy estate tax advantages by transferring assets from your estate to your living trust, thus potentially reducing the estate’s size and subsequent tax liability. However, living trusts can be tax complex.
For instance, if your living trust generates income, it may be subject to income tax. Moreover, managing tax implications within a living trust often requires a savvy understanding of tax laws or the assistance of a professional.
On the other hand, having only a will doesn’t provide any estate tax shelter. If your estate is of significant size, specifically valued over $12.92 million as of 2023 for an individual, it will be subject to federal estate tax which can range from 18% to 40%.
8. Probate
- Living Trust: Bypasses probate, saving time and money.
- Will: Typically undergoes 6-9 month probate (longer for complex estates).
Wills typically go through probate, which on average takes 6 to 9 months — sometimes even longer, depending on the estate’s complexity and the probate court’s efficiency.
In contrast, living trusts bypass the probate process and can result in significant time and monetary savings for beneficiaries. This is especially important for individuals with dependents who rely on them financially, as a seamless transition of assets can provide much-needed economic stability during challenging times.
On top of guaranteeing a smooth transfer, living trusts also offer a solution for more complex asset scenarios, such as complications arising from owning assets in multiple states. For instance, a resident of California who owns property in Nevada would ordinarily require probate processes in both states. With a properly set up living trust, the resident can avoid this dual probate necessity.
► READ MORE: How to Avoid Probate: 5 Best Ways to Leave Property Upon Death
9. Privacy
- Living Trust: Private.
- Will: Public record post-probate; accessible via court records online or in-person.
Upon a person’s death, their will is filed with the courts for a probate hearing, becoming a part of the public record. This means that anyone who searches the probate court records can access the details contained within the will, such as asset distribution and names of beneficiaries. This can be done online or by visiting the court in person, depending on the jurisdiction’s system.
Contrarily, living trusts offer a veil of privacy as they are not subject to the probate process and remain legally private. This is particularly beneficial for individuals who prefer keeping their estate matters confidential. Furthermore, certain types of trusts like blind trusts enhance privacy to a level where even the beneficiaries are unaware of the assets within the trust.
What Is Better, a Will or a Living Trust?
Determining whether a will or a living trust is “better” for you largely depends on your personal circumstances and financial situation. Every situation is unique, so it’s advisable to consult with an estate planning attorney who can provide personalized advice based on your individual needs and state laws.
Here’s a series of key points to consider before you make a decision:
Budget
As previously mentioned, establishing a living trust can be more expensive upfront when compared to drafting a will. Ongoing management, such as taxes and administrative fees, can also add to your expenses.
However, as living trusts usually avoid probate, which on average costs $1,500, the long-term financial implications could be more favorable with a living trust under certain circumstances, such as owning assets across states.
Below are some simplified equations to help you calculate the costs of a will and a living trust:
Estate Value Below Federal Estate Tax Threshold
Total Cost of Will
(C) Cost of set-up (from $0 ~ $300) +
(P) Probate cost (avg. $1,500)
Total Cost of Living Trust
(C) Cost of set-up (avg. $2,000) +
(M) (Annual maintenance cost of the trust (avg. 1% of total estate value) × Number of years the trust is maintained) +
(I) Trust’s income tax (if applicable)
Estate Value Above Federal Estate Tax Threshold
Total Cost of Will
(C) Cost of set-up (from $0 ~ $300) +
(P) Probate cost (avg. $1,500) +
(T) Estate tax rate × ( Total estate value – Federal estate tax threshold)
Total Cost of Living Trust
(C) Cost of set-up (avg. $2,000) +
(M) (Annual maintenance cost of the trust (avg. 1% of total estate value) × Number of years the trust is maintained)+
(I) Trust’s income tax (if applicable) +
(T) Estate tax rate × ( Total estate value – Federal estate tax threshold)
Estate Size
If your estate’s value exceeds the federal estate tax filing threshold, consider establishing a living trust that offers tax benefits and transferring a portion of your assets into it. More complex estates, such as multiple properties, investments, or business interests, may also benefit from a living trust’s structured management.
On the other hand, a will offers a more straightforward solution if your estate is relatively simple and falls below the tax threshold. It’s particularly fitting if your estate mainly consists of common assets like a home, bank accounts, and personal possessions.
Susan's Tip
Monitor the federal estate tax filing threshold as it changes year to year. The estate value for an individual in 2023 is $12.92 million and increasing in 2024 to $13.61 million. Just 10 years ago in 2013, the amount was only $5.25 million.
Distribution
With a will, the distribution of assets only occurs upon one’s death, and it’s a one-time distribution. Conversely, living trusts provide a more flexible approach, enabling the grantor to set distribution timelines, triggering events, or conditions under which the trustee will distribute the assets to beneficiaries.
For instance, in a spendthrift trust, you could specify that beneficiaries may only receive income generated from the assets, rather than accessing the entire principal amount.
Dependents
A will allows you to appoint guardians for your children, other dependents, and even pets — something that’s not covered in living trusts.
On the other hand, establishing living trusts can be a prudent step to set aside funds specifically for the care and support of your dependents. Structured financial provisions in living trusts can offer a more controlled and sustained financial support, ensuring your dependents continue to receive the necessary care and resources over time.
Susan's Tip
If you have a large estate and minor children, then I strongly recommend you consider both a living trust and will to ensure you leave your dependents with the best care and support.
Probate Process
If your state has a challenging or prolonged probate process, a living trust can be advantageous as it allows your assets to bypass probate, facilitating a smoother transition.
It’s worth noting that some states offer simplified probate processes for small or uncomplicated estates, which might lessen the appeal of a living trust in avoiding probate. Hence, knowing and evaluating your state’s probate process is crucial to making an informed decision between a will and a living trust.
Susan's Tip
The estate value for simplified or summary probate ranges between the states, anywhere from $25,000 to over $100,000.
Management
Living trusts demand more time and effort compared to wills. As a living trust’s grantor, you would need to continually update the living trust with any new assets acquired, ensure correct title on assets, and liaise with the trustee on the living trust’s operation, which can be time-consuming.
On the flip side, wills require little to no management post-creation. Apart from reviewing and possibly updating your will during significant life changes (e.g., marriage, divorce, or the birth of a child), there’s no ongoing management required, making it a less demanding option in terms of time and effort.
Can I Have Both?
Yes, you can have both, and sometimes it’s beneficial to have both. It’s important to remember that a living trust and a last will are not mutually exclusive. But do you need both?
Here’s attorney Susan Chai’s answer.
“If you have a large estate and dependents, then having both a living trust and a will ensures there are no gaps in your estate plan and that you cover all your bases.”
As previously stated, a living trust allows you to have more control over how and when your assets are distributed. This is particularly useful in cases where beneficiaries may not be financially savvy or have special needs.
However, since a living trust handles only those assets owned by the living trust, you may still need a will to designate guardians for your dependents and ensure all your remaining assets outside the living trust are accounted for.
If you choose to create both, consider creating a pour-over will to go along with your living trust. A pour-over will ensures that any assets not included in your living trust at the time of your death are transferred into the living trust during the probate process. This way, these assets will be distributed according to the terms of your living trust.
Susan's Tip
Pour-over wills may still have to go through probate, depending on the state.
Plan Thoroughly
Having worked tirelessly and saved diligently over the years, it’s crucial that you create a formal estate plan to avoid misallocation of assets, estate value diminution, or hindering loved ones from accessing their inheritance.
Legal experts often recommend at least having a last will and testament. Additionally, a living trust can significantly streamline the asset transfer process, keeping it private and bypassing probate. Employing both a will and a living trust often emerges as a prudent strategy to ensure your assets are allocated precisely as you envision.
Frequently Asked Questions
Answered by Susan Chai Esq., attorney
Does a Will Override a Living Trust?
A will does not override a living trust. Generally, a living trust is operative during the grantor’s lifetime once executed; it’s legally binding before a will which only takes effect after the grantor’s death.
However, a testamentary trust, which is created by a will, doesn’t become operative until the will takes effect. It’s essential to ensure both documents are aligned to avoid contradictions in your estate plan.
Are Wills and Living Trusts Valid in All States?
Both wills and living trusts are generally recognized and valid across all states. A living trust remains valid regardless of state borders post-execution. Similarly, most states honor valid out-of-state wills, although rules might vary slightly, especially concerning marital property and executor eligibility.
However, if relocating permanently, revising your will or amending your living trust to align with your new state’s laws might be prudent. Additionally, be mindful of varying probate costs across states to ensure a smooth asset transition for your beneficiaries.
At What Net Worth Do I Need a Living Trust?
Individuals with estates valued over the federal estate tax exemption threshold of $12.92 million as of 2023 often find living trusts beneficial for tax reasons.
However, the necessity of a living trust doesn’t solely hinge on net worth; it’s more about your financial circumstances and estate planning goals. Consult with a financial advisor or estate planning attorney to determine the most suitable estate plan for your unique situation, regardless of your net worth.
Disclaimer: The information provided in this article is intended for general informational purposes only and should not be considered as professional legal advice. The content does not create an attorney-client relationship. Estate planning laws and regulations vary by state and are subject to change. For personalized legal advice, please consult a licensed attorney who is knowledgeable in estate planning in your jurisdiction.
