Both wills and living trusts are designed to pass on assets at death. However, they use different means and even different laws to do it. These differences must be understood to decide which one is right for you.
A will is a document which sets out the disposition of assets in the event of the creator’s death. It does not become official until its creator dies and any required probate proceeding is filed.
A living trust is a legal contract between the grantor, the beneficiaries, and a trustee who agrees to hold assets for the beneficiary after the creator’s death. It becomes official and is set up the moment it is signed by all parties.
Wills are easier and cheaper to make than living trusts, but are also more expensive and difficult to enforce. In effect, trusts are front-loaded with the effort and expense of interpretation and application, while wills are back-loaded. Thus, wills are easier and cheaper for the grantor, while living trusts are easier and cheaper for the beneficiaries.
Laws regarding wills change from state to state, and parts which may be applicable in some states may not be applicable in others. Rather than adding codicils after each move, it may be simpler to create an entirely new will. Living trusts are governed by trust law, which has less state-to-state variation. If the will’s creator has moved after creating the will, or his estate includes property in more than a single state, a living trust may come closer to allowing its creator’s intent than a will.
Living trusts are generally more complex documents than wills, because a contract has to stipulate many specifics which are already assumed in a will. This complexity can also be an asset, because it gives flexibility. For example, the living trust does not have to rely on existing statutory and case law for its interpretation and application, the way a will does. As a contract, you can write any legal terms and conditions you want.
Wills can allow for independent administration, which often simplifies interpretation and application of the will. Even in an uncontested case, appointing an executor under independent administration can take at least 30 days. If a will is contested, the estate will be placed under court supervision until everything is sorted out, a process that sometimes takes years.
A living trust always names its trustee, and can change that trustee in future contracts. The trustee has immediate control over the trust’s assets when the conditions of the trust are met. No outside intervention is required.
When a will comes into effect, the provisions of the will control any assets that do not pass to beneficiaries by non-probate methods. Any attempt to pass assets through beneficiary or survivor arrangements instead of through the will can destroy the tax planning in a will. For example, an IRA can be rolled over to a surviving spouse without triggering additional taxes, but anything which challenges the spouse’s claim to the IRA may require it to close.
The moment a living trust is set up, the trust is the legal title owner of the assets thereafter. Because it is transparent for income tax purposes, it does not require a separate tax number. However, the trustee controls the trust, and can deal with the assets of that trust as he sees fit. It is common to name the grantor as the trustee of the property covered by the trust during his lifetime.
Qualified plans and IRAs are not normally transferred to a trust during the grantor’s lifetime, because that would trigger income taxes. However, a trust can be named as the beneficiary of those plans. This can get complicated.
A living trust can be set up to protect part of the estate in order to provide for dependents who might otherwise risk losing some or all of the estate due to the way the will is interpreted. Independent living trusts can be set up for different people, can take delayed effect, and can even set requirements on how the trust is to be used. For example, only a living trust can ensure that a child must reach his majority to access the trust’s money, and can only use it for his education.
A will does not allow for disability or future incompetence of its creator, because it only comes into effect after the creator’s death. In a living trust, which comes into effect immediately, a trustee may be named in case of disability or future incompetence.
Finally, living trusts are private between the grantor, trustee, and beneficiary. Wills are public. This may be the deciding factor if you don’t want the family’s dirty laundry to be aired in public.