Living trust versus will: Which is right for you?

There are several strategies that can be part of your estate planning process. Two of the most common are trusts and wills. Both can help you protect and distribute your assets to your loved ones, but they differ in terms of what they can include and how they're managed. Here are a few things to consider as you decide which approach is right for your needs.

Brief history of trusts, wills, and estate planning

Wills date back at least as early as Ancient Rome where they were recognized in the Code of Justinian. The term "last will" probably originated with early English common law. It was thought to have been used when there were no clear bloodlines for inheritance. After the Norman invasion of England by William the Conqueror in 1066, old English common law blended with French civil law. This may have led to the inclusion of the word "testamentary." So, today we have the "last will and testament."

Trusts were also used in the Roman Empire. Roman legionaries were often deployed for extended periods of time. They needed a way to care for their families financially while they were away or if they were killed. So Romans formalized a way to entrust their assets to someone else who could oversee their estates.

Fast forward to the early 1900s, and we see masses of people beginning to accumulate wealth in the United States. Americans became more concerned with how their hard-earned assets passed upon their death. Estate planning and the use of wills and trusts began to be more important as people had more assets to pass on to family, loved ones, charity, or other institutions.

Estate planning basics

Before comparing wills versus trusts, consider your needs and review some estate planning basics. Even if your estate planning goals are simple, it's easy to become confused by the different ways you can achieve them. Here are a few questions to help you stay focused on your desired end-result. You may want to discuss them with your qualified estate attorney.

• If I'm incapacitated for whatever reason, will my financial affairs and medical treatment continue as normally as possible?
• Will my property pass to who I want, when I want? Are there any special circumstances that I may want to control?
• Do I have the best plan in place to pass my estate to my heirs while I'm alive, or at my death, while minimizing costs, fees, and estate taxes?

Probate: Good or bad?

Probate is the formal legal process governed by each state's laws for the organized settlement of an estate. Many people believe probate is a dreaded experience that should be avoided at any cost. This shouldn't be the case. The probate process gives recognition to a will and appoints the executor. The executor then manages the settlement process and distributes any remaining assets to the intended beneficiaries, honoring the deceased person's last wishes.

Last will and testament

There are numerous strategies that may be employed to achieve your estate planning goals. A will is a common estate planning document. This legal document states how you want your property to be disposed of upon your death. A will can create a trust to control assets for family members if they are unable to do so themselves. It can also name guardians for your children. A will can be very detailed or provide only general guidelines.

Other estate planning methods and documents

• Forms of ownership or operation of law — such as joint tenancy with right of survivorship — JTWROS, or payable or transferable on death — POD/TOD, are types of ownership that can supersede the will and may avoid probate. For example, it may be common for a couple to legally own a home as JTWROS, which means that upon the death of one spouse, their share of ownership passes to the surviving spouse without requiring probate.
• Beneficiary designations and contracts for retirement plans, insurance policies, or annuity contracts generally name your desired beneficiaries. These designations also supersede the will and avoid probate.
• Powers of attorney — POA, gives someone the power to act on your behalf while you are alive and can be broad or narrow in scope — General or Special. The POA can take effect when you become disabled — "springing" power — or can be effective both before and after disability — "durable" power of attorney, allowing the holder to act on your behalf at any time.
• Advanced health care directives include durable power of attorney for health care — HCPOA, also known as a living will, or do not resuscitate orders — DNR.

Trusts

Beyond the basic documents and strategies mentioned above, establishing a trust may be the next important step in your overall estate plan. There are three parties involved with a trust agreement:

1. The person(s) establishing the trust — grantors, or in our earlier example, the Roman soldier.
2. The person(s) or entity benefiting from the trust — beneficiaries, or in our example, the soldier's family.
3. And the person or entity with the responsibility to manage the trust — trustee. Someone or some institution the Roman soldier trusted to carry out his wishes in his absence.

When you might need a trust

Trusts can be created during life or at death and can be revocable or irrevocable. Trusts are subject to individual state law and can help avoid probate — if that is a goal. Here are some situations where a trust may be appropriate:

• Blended families. Trusts could help ensure that your assets go to those you want and to help avoid family disputes.
• Minor children. For example, a testamentary trust as part of your will can specify who is to care for a child, when they are to receive an inheritance, and how the money is to be spent. Trusts also can help provide for children with special needs by paying for expenses not covered by government programs.
• Real estate holdings in more than one state. A trust can help avoid the attorney and court fees associated with going through probate in each state where you own property.
• Life insurance. Trusts can hold life insurance intended to pay estate taxes, equalize the value of inheritances for business owners or create liquidity for other purposes.

Check out this video to learn more about the differences between wills and trusts.^{See note1}

Other things to know about trusts

Trusts are subject to income taxes just like people are. A common form of a trust is a “revocable living trust,” or RLT, which could be used to own your investments. Generally, with this type of trust, you would report the taxable income or gains and losses similarly to your personal tax reporting.

Some trusts, such as the RLT, may afford protection from creditors, subject to state law. And a trust may make it more difficult for financial predators to prey upon the trust beneficiaries — think in terms of unsavory in-laws.

Generally, a trust may be more expensive to set up and manage over time as opposed to wills or other estate planning strategies. Nevertheless, if the trust is what you really need, then it may save you or your family much more in the long run.

Now that you know a little more about trusts, let's discuss two common questions: Who can write your trust document, and who can manage the trust?

Creating wills and trust documents

Given the complexities involved with estate planning, along with individual states' varying laws, it's highly recommended that you seek help from a qualified professional.

• If you're inclined to do your estate planning online, start by visiting Trust & Will.
• Active-duty service members and their dependents, as well as retired or disabled service members and their dependents, may be eligible to take advantage of no-cost legal assistance. Commonly known as JAG, this service can include estate planning. To find a general legal services provider in the U.S., visit the U.S. Armed Forces Legal Assistance Locator.^{See note1}
• Still undecided? For more education or to find a local attorney who specializes in estate planning Visit the American College of Trust and Estate Counsel.^{See note1}