When people think about planning for their death, they usually think of drawing up a will and leaving behind funeral wishes. Too many people fail to realize that a living trust might be a better option than a will simply because they don’t know the difference between the two.
How is a Living Trust Different from a Will?
A living trust and a will are legal documents that tell the courts how to distribute your assets. While their purpose is similar, there are some stark differences between the two. Speaking with a trusted attorney about these differences is important to determine the best option for you. Johnson May Law has an experienced team that is ready to ensure the best decision is made for you. Below are some differences between wills and living trusts to consider.
When the document takes effect
In the most basic terms, a will goes into effect upon your death, while a living trust takes effect immediately, even if you are still living.
What you can designate
A will is a more simple document, while a living trust is a bit more complicated. In a will, you can designate who inherits which assets and who gets custody of your children and/or pets, and you can specify any funeral arrangements. If you live a relatively simple life, owning one property and having less than $200,000 in assets, a will is probably going to be the right choice.
A living trust, on the other hand, is more complicated. With a living trust, you can decide who gets which of your assets and when and how they are distributed. If you own multiple properties and have over $200,000 in assets, you will most likely benefit from a living trust over a will.
Another important difference between wills and living trusts is whether or not you go through probate court. Probate is the process the court goes through to distribute your assets and pay your debts after you die. If you have a will, then after you die, there will be a period of probate. One major benefit of a living trust is that it avoids the probate process altogether.
What’s So Bad About Probate?
As discussed earlier, if you have a living trust, there is no period of probate. This is a tremendous incentive because probate can take up a lot of time, be expensive, and be embarrassing for families.
Probate takes time
One drawback to enduring probate is the amount of time it takes. Once a person passes away, their assets are frozen until the courts finish probate. Accounts are frozen, so an accurate inventory of assets, estates, and debts can be taken. Then, beneficiaries are notified, so if anyone wants to contest the will, they have the opportunity. Once the court sifts through assets and pays debts, only then is your will enacted.
If you have a will and designate your beneficiaries, they will not immediately receive that inheritance. They have to wait until the courts finish going through probate, which can last between one and two years. If you have a beneficiary who is relying on your assets, this time can be detrimental. While there are ways to appeal and get the assets more quickly, those appeals can be denied.
Probate costs money
Typically, the probate process will cost around $2,500, assuming it is not a large estate and there are no contenders. These costs are made up of attorney fees, court and filing fees, appraisal and accounting fees, executor fees, and other miscellaneous fees, depending on your state and the size of the estate. If you own property in multiple states, you will have to go through probate in each state, which adds to the cost and duration of the probate period.
Lack of privacy
Before you die, your will is sealed. No one has the right or authority to be granted access to it. Upon your death, your will enters probate court. Once this happens, it is public record. Anyone from a disgruntled family member to a sworn enemy can request information about your assets and/or your debts.
Money is a highly sensitive and personal topic. Families can endure embarrassment and scrutiny if a person wants to know how much debt you left unpaid or how much money you had in your bank accounts. Beyond embarrassment, if you had a larger estate, your beneficiaries can be hassled once they inherit significant assets.
Probate is a hassle and a headache. Creating a living trust will circumvent this process and allow your assets to be distributed immediately.
How do I set up a living trust?
To set up a living trust, there are three terms to be aware of. The trustor is the person who draws up the trust, the trustee is the person who manages the living trust, and the beneficiary is the person who inherits the assets designated in the trust. A living trust is unique because one person can act as all three parties. You can be the trustor, the trustee, and the beneficiary. Essentially, you make yourself the trustee of your estate. If you are married, you and your spouse will either become co-trustees, or you can have your own separate living trusts.
No longer do you own your assets. Your trust, which is controlled by you, owns your assets. You do not lose possession or control of any of your assets. This is an important distinction because when you die, there is nothing for the courts to control since you do not technically own anything. Since your trust controls all your assets, there is no probate process.
Most importantly, to set up a living trust, be sure to hire a trusted attorney to guide you through this process and ensure everything is in order.
Are There Limitations to Living Trusts?
While a living trust might sound like a no-brainer, there are some drawbacks and limitations to be aware of.
Some people may believe that creating a living trust is a great way to eliminate assets in your name, so you can qualify for Medicaid and save on health insurance. However, this is not the case. People need to meet a variety of criteria to qualify for Medicaid, which is in place to help those who need it. If you have a living trust, those assets will be taken into consideration if you apply for Medicaid.
Along the same lines, your income taxes will not be reduced if you have a living will. Similar to applying for Medicaid, any assets in your trust are still yours when you file your income taxes. Any income you earn from the assets in your trust will be taxed at the usual rate.
Along the same lines, if you should become incapacitated, a living trust will allow you to appoint someone to control your assets if you no longer can. However, a living trust does now allow another person to make your end-of-life or medical decisions. If you want to appoint someone to make medical decisions on your behalf, you will need to name someone in your living will or set up a power of attorney.
There are many benefits to creating a living trust, and it could be the right choice for you and your family. If you have questions or are ready to begin this process, make sure you contact a trusted attorney with vast experience. Johnson May Law will work with you to make individualized decisions that are right for you. Creating a living trust is a highly personal process, and decisions need to be appointed on a case-by-case basis. Contact Johnson May Law today.