Knowing the difference between a Last Will and Testament and a Living Trust is essential when planning your estate. According to the AARP, most people who do estate planning these days prefer to use a trust. In the past, the people have heavily favored a will. But what has changed?
In past generations, families were very close, few estates had any tax liability, and children respected their parents’ wishes before and after their parents’ deaths. We live in a different time. Estate litigation is no longer rare. For your wishes to be carried out, they must be in writing, and that documentation will govern what actually gets done when you cannot speak for yourself.
The difference between a will and a trust is that a will operates only after your death, while a trust works in the present. A will is used to pass your assets at death, but it cannot help if you become incapacitated during your lifetime. On the other hand, a trust is in effect from the moment it is properly set up and funded, providing protection and assurance that your wishes will be carried out during any disability and at your death. A will must go through the court proceeding known as probate after you die to become a legally effective instrument to carry out your wishes, while a trust functions without the need for court involvement, both in the event of disability and at death.
If you select a will to plan your estate, and because the will is only effective after your death, you will need additional provisions for someone to manage your assets in the event of your incapacity during life. Many people have utilized a durable power of attorney for this purpose. Unfortunately, in recent years, many have dealt with banks and other financial institutions that refuse to honor their power of attorney because no one is legally required to do so. Without an alternative, this can mean an expensive and burdensome conservatorship, but a living trust can replace a power of attorney, which must be honored. Problem solved.
Some people put their children’s names on their assets to allow them to deal with those assets in case of the parent’s disability. This sounds good, but it can result in the assets being exposed to the child’s creditors, to significant risk in the event of bankruptcy, or even being considered an asset to be divided in their divorce since the child is now a co-owner of the assets. Of course, making a child a co-owner of real property does not give that child authority to deal with it but will subject their interest to their creditors’ claims, if any. The same problems can arise when using lifetime gifting to avoid probate or reduce the taxable estate’s size. Instead of an outright gift, you can use a specific type of protective trust for the child.
Don’t want your assets to wind up in the hands of your former son-in-law (or daughter-in-law) and their new spouse? What about your children from a prior marriage? You can ensure that your children won’t be “accidentally disinherited” but that your spouse has the benefits of your estate during their lifetime and that your children can receive their inheritance. Accomplish your estate planning using a living trust.
Some people include elaborate trust structures within their Last Wills and Testaments. There’s nothing wrong with that, as long as they realize that for these trusts (called “testamentary trusts” as opposed to “living trusts”) to come into existence, the will must first go through the probate process. The better practice is to avoid probate entirely using a living trust.
Above all, make sure you understand your plan entirely and that it will accomplish your objectives. Some do; some don’t. Make sure yours does. After all, you are paying for it.
Kyle Wynn & Associates, PLLC is an exclusively elder law and estate planning law firm serving clients in Mississippi, Louisiana, and Tennessee for more than forty-two years from offices in Mississippi and Louisiana.
