In recent years, living trusts have received some attention as an alternative to wills for passing property upon death. Libraries and bookstores abound with “Make Your Own Living Trust" books and the web has no shortage of articles on creating such trusts. Still, the trust vehicle is misunderstood by many people.
Trusts, along with other “nonprobabe" will substitutes can be useful weapons in an estate planning arsenal. But, the question often remains, what is best for a particular situation?
To answer this question, we should look at the three primary goals of an effective estate plan:
The transfer of property in a timely and efficient manner,
The ability to provide for management of your property if you are physically or mentally incapable of doing so, and
The minimization of the amount of estate taxes imposed.
Knowing these three goals can help you decide whether a trust, a will or a combination of the two is best for your situation.
Both wills and living trusts are ways of transferring property to your heirs. The primary difference between wills and trusts is that wills require a probate administration that can add time and costs to the disposition of your estate. In smaller estates, this problem is significantly reduced by utilizing a “simplified probate" procedure. However, for somewhat larger estates, avoiding the additional costs and publicity of probate by the use of a living trust is preferable.
If the issue of property management during a property owner’s incapacity arises, both a properly prepared will or trust-based estate plan will have a durable power of attorney which enables someone you have chosen to manage your property. However, living trusts also provide for “substitute management" by a successor trustee for assets in a living trust. This can be beneficial because there is the real possibility that financial institutions and insurance companies may not accept durable powers of attorney, but will accept successor trustee management.
Overall, for moderate to large estates, a living trust may provide the best tool for estate planning. However, living trusts are not needed by everybody and care should be taken in choosing between a will and a trust. For additional information about these planning documents, see our Estate Planning Learning Center.