You have worked hard for what you have and are interested in understanding where your wealth would go if something unplanned were to happen. Of course you don’t want a random probate court to decide what would happen to your assets when they find you don’t have any written legal representation.
Your options as of now in dictating where your money would go would most likely fall under either:
- a Will or
- a Living Trust. (The scope of this discussion will be around living trusts, which cover the needs of the majority of Californians and Americans.)
Many might not know the differences between a will and a trust, as they get used interchangeably, but it’s important to first understand what the similarities are before understanding what distinguishes between the two.
Will vs Living Trust: The Similarities
Both a will and a living trust deal with what happens to your property after you pass away, and are directives from you.
They can be changed during your lifetime as your mind changes, allowing for flexibility. Life is a long journey and someone you decided was appropriate to be a trustee years ago, may not make as much sense now. Wills and trusts are frequently updated.
Some would think that a will or trust is only for people that are in the later stages of life but it’s important to consider what conflict could arise after an unexpected death in the family.
- Even if you’re a young parent who just bought a home, your mortgage liability in itself could send your spouse and child into bankruptcy as probate costs show no mercy.
- You should definitely plan sooner rather than later in order to avoid headaches for your heirs.
Will vs Living Trust: The Differences
A will and a living trust have many more differences than similarities. The cost and benefits both must be weighed against the amount of assets the person of interest holds. This means if you have more assets (more than $150,000 worth of property, savings etc.) that you should look into a Living Trust as it has the ability to withstand more unforeseen opposition in event of injury or incapacity, offer potential tax savings and accomplishes a title transfer that avoids the courts.
- A will would only work up to a certain threshold ($150,000 in California) to avoid probate court, and can be easily contested in court by unhappy family members. This means that a Living Trust has an added layer of protection in addition to the added benefits that come with its higher cost in time and money to set up.
- Part of the living trust process allows for a plan during your lifetime if you were injured or incapacitated, allowing for trustees to care for your estate if you are not able to. There is more flexibility when it comes to choosing who can manage your assets as well as limiting their control or distributing it amongst more than one trustee. It also gives the trust the ability to avoid legal battles when written and funded correctly, easing the process in light of grieving times.
- With the ease of the title of the home passing to the next generation with no issues, you can retain the lower property taxes that the older generation was paying. The younger generation also receives a step-up in cost basis so if they go to sell the home, their capital gains tax would be less or none.
A Will or a Living Trust?
Why have a will when a trust seems to have more benefits? Well, with more benefits come funding meaning that it is more expensive and time-consuming to establish (trust documents must be notarized, for example).
You also need to be able to fund a trust in order for it to be valid. Many make the mistake of setting up a nice trust but forget to fund it (transfer property title deeds into the name of the trust). People do this all the time on an automated online service, and forget to take the necessary step of transferring title. Hence, the shell of an unfunded trust would be useless in court.
A will has less cost, but your assets should be below $150,000 (this includes the full appraised value of your home) and you need to accept the risk that it can be easily contested.
This blog post in not entirely representative of what may constitute your decision between a will and a trust. In order to best understand which would be best for you, consulting a good estate planner and insurance agent (to determine shortfalls and liquidity for your survivors) is absolutely crucial to meeting your needs.