Living Trust or a Will?

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Fork in The Road




Estate Planning:  Do You Need A Living Trust or a Will?

In previous posts, I have mentioned that there are four cornerstones of most estate plans.  Those are a power of attorney for healthcare, a power of attorney for financial, a healthcare directive and a trust and/or a will.  This article will focus on trusts and wills and their differences.

Whether or not a married couple or an individual needs a will or a trust depends on a variety of factors.  Chief among those factors is the value of their assets and income.  Clients with more money tend to have more complex assets and goals.  Estate tax planning is much more important as well.

A revocable living trust, i.e. a trust that can be changed at any time, revoked and/or amended, is typically a more complex document than a will.  They are designed primarily to avoid probate, but only do so when assets are “funded” into the trust, i.e. re-titled into the trust.  Trusts also allow for privacy because they are not publicly filed documents, unlike wills.

Trusts have trustees, who manage the assets of the trust and the powers and limitations of their role as trustee are laid out in the trust document.  In the case of married couple, each spouse is usually a co-trustee of their trust.

As an illustration of just how confusing estate planning can be, a revocable living trust also requires each spouse to create a “pour-over will”, which is a will that is created in the event that any titled asset (a home for example) is not included in the trust and must be administered through probate.  The term “pour-over” is used because the assets in probate are “poured-over” to the trust by the terms of the will.

Trusts are typically much more complex than wills.  Much of the complexity is related to the ongoing nature of a trust versus a will.  Wills come into play once a person is deceased.  The executor (called a “personal representative” in Missouri) is named in the will to handle the administration of assets after the death of the person creating the will.

While living trusts are designed to avoid probate, wills, without further planning, do not avoid probate.  They merely provide a list of wishes for the executor to follow in probate and set limitations on the executor’s powers and duties.  Because probate is an expensive, time consuming and complex process, probate avoidance should be an important estate planning goal for most people.

Wills are also very important for couples with young children (or kids under 18), as they allow you to name a guardian if both spouses were to pass away and also to create a testamentary trust (a trust that is created by the will and takes effect if both spouses pass away with children under 18) to name a trustee to manage money for young children who cannot inherit.  This is vitally important and is normally built into the language of a trust.

In my opinion, trusts allow for much more flexible and tailored estate planning for clients.  However, because of their complexity they are not for everyone.  Clients with simpler assets and goals will find that wills are a much better fit for their needs.