CNBC reported in 2022 that only 33% of adults in the U.S. have an estate plan. For many people, the starting point for an estate plan is a will, but is it the right choice?
Estate planning involves making significant decisions, and one of the most common choices is whether to use a will or a living trust. Both these legal tools serve the purpose of distributing your assets after your passing, but they have distinctive characteristics. Selecting the right one is pivotal for effective estate planning.
A will is a legal document that outlines your wishes concerning the distribution of your assets when you pass away. It offers clear instructions to your family and the court on how you want to handle the management of your finances, property and belongings. Some key aspects of wills include:
- Distribution of Assets: Wills detail how to divide your assets among your beneficiaries or heirs. You can specify who receives particular items or sums.
- Executor: You appoint an executor in a will, who becomes responsible for carrying out your wishes. This individual manages the estate and handles administrative duties.
- Probate: Wills typically go through probate, a legal process during which the court verifies the will’s authenticity and oversees asset distribution. This process can be time-consuming and costly.
- Flexibility: Wills offer flexibility, and you can update them as your circumstances change. Amendments to your will are relatively straightforward.
Living trusts explained
A living trust is a legal entity that holds and manages your assets while you are alive and after your passing. You retain control over your assets and name a successor trustee to manage them when you are no longer able to do so. Some key aspects of living trusts include:
Avoiding Probate: A significant advantage of living trusts is the potential to bypass probate, which can be a lengthy and costly process. Assets held within the trust go to beneficiaries without court involvement.
Incapacity Planning: Living trusts facilitate the seamless management of your assets if you become incapacitated. The successor trustee you designate can take over without needing court intervention.
Privacy: Unlike wills, living trusts are private documents. The details of your estate and beneficiaries remain confidential, as opposed to becoming public during probate.
Continuity: Living trusts provide a smoother transition of assets and management after your passing or in the case of incapacity. This reduces the potential for disputes and confusion.
The decision between a will and a living trust hinges on your unique circumstances, including the complexity of your estate and your specific goals. Make sure to properly assess your situation before making a decision, and understand that you can use both tools if you desire.