Creating a Trust in Your Will vs. Creating a Living Trust: Part 2

Last week, we discussed the process of creating a trust through your will. This week, we will explain how a trust established during your lifetime (known as a revocable living trust) operates differently, what your family will experience once you’ve set up a living trust, and how to determine which method truly suits your needs.

To recap, a “testamentary trust” is formed in your will and only takes effect after your estate has gone through probate. Consequently, your family may have to wait several months, and in some cases, even years, while the court manages the probate process and sets up your trust. If your goal is to keep your family out of court and ensure complete privacy after your incapacity or passing, a testamentary trust will not achieve that.

On the other hand, a living trust, created while you are alive and properly “funded,” will keep your family out of court, offer the privacy you likely desire for them, and generally simplify matters for your loved ones when something happens to you.

In this article, we will clarify how living trusts provide these advantages, assist you in evaluating the trade-offs between the two methods, and guide you on how to be your own best advisor and make well-informed choices.

Understanding How a Living Trust Functions

A living trust, commonly referred to as a revocable living trust, is established and funded while you are alive and capable of making decisions. You transfer ownership of your assets into the trust now, designating yourself as the initial trustee. This allows you to retain full control throughout your lifetime. You can purchase property, sell property, alter investments, and manage everything just as you did before. The trust imposes no restrictions on you whatsoever.

The trust agreement contains comprehensive instructions regarding the fate of trust assets upon your death or if you become incapacitated. Within this agreement, you will appoint a successor trustee, the individual who will assume management of the trust assets when you are unable to act as trustee. You determine who will receive the trust assets, when they will receive them, and under what circumstances. All the protective measures you might include in a testamentary trust can also be incorporated into a living trust.

Here’s the key difference between a living trust and a testamentary trust: when you pass away or if you become incapacitated and are unable to make decisions for yourself, the living trust is already in place and owns your assets. Your successor trustee does not require court approval to start managing the trust property. There is no need for probate filing. No delays for court consent. No public disclosure of your assets or beneficiaries. The successor trustee simply adheres to the instructions you have laid out in the trust agreement.

This means your family can avoid the delays, costs, and public scrutiny associated with probate court. Your trustee is able to promptly pay bills, manage properties, and start distributing assets to your beneficiaries based on your schedule. If you’ve set up protections for your children’s inheritance until they reach a specific age, those safeguards take effect right away. Your family enjoys the advantages of your planning exactly when they need it the most.

Additionally, the living trust offers protection in case you become incapacitated before your passing. Should illness, injury, or cognitive decline prevent you from managing your affairs, your successor trustee can take over and manage everything for you, sparing your family from the need to pursue court guardianship. Your designated successor simply assumes the responsibilities you’ve outlined for them.

However – and this is extremely important – living trusts only govern assets that have been transferred into the trust. In the realm of estate planning attorneys, we refer to this as “funding” the trust, and it is a vital step that many individuals neglect, even when consulting with a lawyer. If you establish a living trust but fail to change the title of your home or retitle your bank accounts, those assets will not be safeguarded by the trust. Upon your death, those assets will have to go through probate. The trust can only manage what it possesses.

This is why collaborating with a lawyer who has established systems and processes tailored for estate planning, particularly Life & Legacy Planning, is crucial. Drafting a trust agreement is merely the initial step and must be integrated into a comprehensive plan that encompasses all your assets, ensures they are titled correctly, clarifies and updates all beneficiary designations, and keeps you informed on how to maintain everything throughout your life. Our office has established processes to support this.

Now that you grasp how both types of trusts operate, the next question is: which one is suitable for your unique circumstances?

Understanding the Real Tradeoffs

Why would someone opt for a testamentary trust when living trusts provide numerous benefits? The primary reason relates to the initial effort and cost involved. Setting up a testamentary trust is typically less expensive at the outset since you’re merely adding clauses to your will. You don’t need to transfer assets into a trust while you’re alive. All of that occurs during the probate process after your passing.

For some individuals, the probate costs may not be significant enough to warrant the initial investment of creating and funding a living trust. Others may not be worried about the probate process at all.

However, think about the hidden expenses your family will encounter. Even a straightforward probate process usually incurs several thousand dollars in legal fees and court costs. This procedure often takes months, and sometimes even years. Your family will need to manage this while they are grieving, collecting documents, communicating with lawyers, and coping with ongoing stress.

In contrast, consider the experience with a well-funded living trust. Your family meets with your successor trustee, who is already aware of your wishes. They collaborate to address immediate needs, inform beneficiaries, and distribute assets as per your instructions. This process is private, generally quicker, and does not require court supervision. For the majority of families, this experience is significantly less stressful and ultimately more cost-effective than probate.

Also, take into account your family dynamics. If you have relatives who might challenge your wishes, the public nature of probate can exacerbate disputes. Anyone can access probate records and see what you left to whom. A living trust maintains privacy, which can help reduce conflict.

Furthermore, think about your specific assets and their complexity. If you own real estate in several states, you will face probate proceedings in each state where you have property. A living trust that holds all your real estate completely avoids this issue. If you own a business, probate delays can negatively impact business operations. A living trust facilitates the smooth continuation of business management.

Grasping these tradeoffs can help you determine which approach is best suited for your situation. However, you don’t have to navigate this journey by yourself. Collaborate with a knowledgeable attorney – who also serves as your trusted advisor – to guide you through your unique circumstances, ensuring you feel confident in your decisions for your loved ones.

How We Assist You in Formulating an Effective Plan

We don’t direct everyone towards a single type of trust. Instead, we begin by helping you comprehend what will genuinely occur if you become incapacitated or pass away, taking into account the specifics of your family dynamics and assets. We’ll guide you through the actual costs, timelines, and experiences your loved ones will encounter. After that, we’ll assist you in identifying what is most important to you, enabling you to make a well-informed decision that aligns with your preferences and budget.

If a living trust is appropriate for your situation, we won’t merely draft the document and send you on your way. We’ll assist you in properly funding the trust, ensuring that assets are retitled correctly and that nothing is missed. Furthermore, we’ll ensure your plan remains current throughout your lifetime, providing support whenever you need it.

Most importantly, we’ll be there for your family when you’re no longer around or if you become incapacitated. This ongoing relationship is crucial. Your loved ones won’t be left to figure things out on their own. They’ll have a trusted advisor who understands you, your wishes, and can guide them in your absence.

If you desire this level of care for yourself and your loved ones, schedule a complimentary 15-minute discovery call to begin today.

Schedule a complimentary 15-minute consultation to learn more.

This article is a service of Kristen Wong of Seasons Estate Planning, APC, a Personal Family Lawyer® Firm. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Life & Legacy Planning Session™, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Life & Legacy Planning Session™.

The content is sourced from Personal Family Lawyer® for use by Personal Family Lawyer® firms, a source believed to be providing accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking legal advice specific to your needs, such advice services must be obtained on your own separate from this educational material.