A client recently asked me whether he needed a will or a living trust. I told him that the answer depends upon the extent of his assets and his specific needs. This post will help you determine whether a will or a living trust may be the right option for you.
A living trust is not for everyone. In Minnesota, a living trust is a good option for unmarried individuals, blended families, individuals with closely held business interests, individuals owning property in other states, some individuals with large, complicated estates, etc. It is important to know the approximate value of your estate and whether you anticipate your estate growing significantly or becoming more complicated at any point.
There are pros and cons to consider before drafting a living trust versus a will. Before exploring these pros and cons, let’s consider the definitions of a will and a living trust.
What is a Will?
A will is a legal document that communicates whom you want to receive your property upon your death. A will also communicates whom you want to be a guardian of your minor children, whom you want to be your personal representative, etc. upon your death. You work hard to earn money to have possessions and property. Many of us are closely tied to our possessions. We also love our families and friends and want to take care of them after we die. A will ensures that your property and possessions will be transferred to the people you want to have them upon your death. This allows us to take care of those we love even after we are no longer with them.
Upon your death, even with a will, your estate will pass through probate. Probate is a legal process by which your assets are distributed to those identified in your will. The probate process settles your estate and your affairs. Your property is gathered and inventoried, your debts are paid, and everything left over is divided among your heirs according to the provisions of your will. Your personal representative is responsible for “probating” your will. The probate process begins with an application filed with the probate court and ends when all debts and taxes are paid and all assets are distributed. If there is disagreement over your will, a probate judge will resolve the differences.
You are not required to have a will. If you die without a will, Minnesota law will control the division of your property. Minnesota law mandates that, in the absence of a will, your property will go to your closest relatives. If you are married and have children, the property will go to them in a manner specified by law. If you are not married and have no children, the property will descend in the following order: grandchildren, parents, brothers and sisters, and then more distant relatives.
What is a Trust?
While a will communicates to whom you want to receive your property upon your death, a trust dictates the manner in which your property will be distributed to others upon your death. A trust requires a donor (you), a trustee, and a beneficiary. A trustee can be a professional with financial knowledge, a relative or friend, or a professional trust company. The trustee holds the title to the property and manages the property for the benefit of the beneficiaries. A beneficiary is the person to whom you would like to transfer your property. This may be a specific person, a group of people, or an organization.
What is a Living Trust?
Specifically, a living trust is a trust you make while you are still alive. If you are a parent, you could establish a trust for your child(ren) during your lifetime and designate yourself as a trustee and your child(ren) as beneficiary. As the beneficiary, the child does not own the property, but is able to benefit from it. Living trusts can be revocable (you can make changes to them) or irrevocable (you cannot make changes to them).
The most popular type of trust is the revocable living trust. A revocable trust usually allows the trustee (you, in this case) to pay all income to yourself for life and to pay the trust assets to named persons after your death. Don’t worry. If the concept seems odd and redundant, then you are understanding it correctly. The pro of a revocable living trust is that you continue to own and use your property during your lifetime, just as you would do with a will, and then your property would automatically be transferred to your beneficiary (your children, perhaps) upon your death. Revocable living trusts avoid the probate process. Revocable living trusts, however, do not shelter assets from federal or state taxes.
An irrevocable living trust is usually set up to reduce estate or income taxes. For tax purposes, the trust becomes a separate entity. Assets cannot be removed nor can you make changes to the trust. In most cases, you cannot be sole the trustee without losing the intended tax benefits. For these reasons, irrevocable living trusts are less common than are revocable living trusts.
Which is Right for Me — a Will or a Living Trust?
There are pros and cons of creating a revocable living trust versus a will. The pros are as follows:
- With a living trust, you are allowed to appoint a trustee with financial expertise to manage your assets during your lifetime. The trustee might charge a fee of around 1% of the total amount of the property in the trust. A trustee could help you invest your assets, arrange for payment of your bills and debts, file your tax returns, etc. You could also establish yourself as a co-trustee for added control of the trust. Having a trustee with financial expertise manage your assets is particularly useful if you are having difficulty managing your financial affairs. Specifically, if your estate exceeds $500,000, if you have property in other states, numerous cumbersome financial obligations, closely held business interests, this could be the right option for you.
- You can protect your privacy regarding the distribution of your assets. A will mandates that an inventory of your estate’s assets be filed with the court. The inventory is, therefore, public information. A revocable living trust, on the other hand, is privately handled upon your death. Typically, only the beneficiaries of the trust will be informed of the nature and the value of the assets.
- Probating a will typically takes time. With a revocable living trust, trust assets can usually be distributed to beneficiaries almost immediately after your death.
- If you own land in another state, like a cabin in Wisconsin, a revocable living trust might help you avoid a probate proceeding in the other state.
There are also some cons in establishing a living trust versus a will. First, transferring property into a revocable living trust may make you ineligible for Medical Assistance. Second, if you are also the trustee, you have an obligation to protect your property, not just for your benefit, but for the benefit of the beneficiaries (i.e., your children). This obligation is a high standard. You will be required to follow the terms of the trust and the law in good faith and with loyalty, confidence, and candor to the beneficiaries. There may be times when your personal interests in your property will conflict with the future interests of your beneficiaries. This can create a conflict, and you may be forced to favor the interests of your beneficiaries over your own interests. Finally, you may also need a will in addition to a living trust, if not all of your property goes into the living trust. If your assets are disposed of by will, they will have to be probated, negating the advantage of the living trust.
Contact Excelsior Law Firm, L.L.C. with any further questions or to obtain a free consultation to determine which estate-planning instrument is right for you.
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