What’s the Difference Between a Living Trust and a Living Will?
What Is a Living Trust?
A living trust is a legal entity that allows you to transfer your assets to a trustee, who thereafter manages those assets for the benefit of your beneficiaries. A living trust avoids probate and is easy to manage after you pass away. This is often recommended as a way to protect assets, “transfer” assets, and distribute assets. Essentially, it does this by taking assets out of your name during life and putting them into the trustee’s name. Then, when you die, the person(s) you have appointed to be a trustee(s) take over control of those assets according to your wishes as stated in the trust document. There are two types of trusts: revocable or irrevocable. A revocable living trust is one that you can change or cancel at any time. An irrevocable living trust cannot be changed or canceled without the permission of the beneficiaries. Choosing between the two for your estate planning needs depends on your specific circumstances. If you want to keep control over your assets while you are alive, a revocable living trust might be right for you. If you want to put your assets out of the reach of creditors or protect them from being seized by lawsuits, you might want to choose an irrevocable living trust. The types of assets you can put into a trust vary depending on the type of trust you choose. Generally, you can place cash, stocks, bonds, real estate, and other valuable assets into a living trust.
What Is a Living Will?
A living will is a document that allows you to state your wishes about what types of life-sustaining treatments you would or would not want in the event you become incapacitated and are unable to communicate. There are several types of living wills, but they typically provide basic information to medical personnel about what types of treatment you do or don’t want if you are dying or otherwise medically incapacitated. Living wills may also include specific instructions regarding the use of antibiotics, artificial hydration and nutrition, organ donation, and pain medication. It allows you to decide ahead of time how much medical intervention you want. In addition, it often explains what types of treatments would be considered “extraordinary” and therefore not desired by the person who has become incapacitated. For instance, the living will state that artificial nutrition and hydration is not desired, but that an unconscious person should be kept alive until natural processes take over. A living will allow other people who might need to make decisions about your care the ability to know what your wishes would be if such a situation arises — and it saves them from having to guess. To some extent, a living will is a way of preventing family disagreements and conflicts over decisions that need to be made immediately about medical care. If you create a living will while you are healthy, it is typically considered legally binding in the event that you become incapacitated.
Difference Between a Living Trust and Living Will
The key difference between the two is that a living trust allows you to transfer assets during your lifetime, while a living will does not. A living will generally just provide information about what treatments you would or would not want in a particular situation.
How to Set-up Living Trust or Living Will
Setting up a Living Trust
The living trust and the living will are two separate entities, but they also work together as part of a comprehensive estate plan. When you set up a living trust, you sign a “declaration” that appoints yourself or someone else as the trustee. It’s very similar to creating an individual retirement account (IRA) at your bank or financial institution. You transfer assets into the trust’s name and then transfer control of those assets to yourself as the trustee. You can name a successor trustee who will take over for you if you become incapacitated and are no longer able to serve as trustee. You can also put in place a mechanism that triggers the transfer of assets from your trust into another account, such as under your spouse’s name, when you die. This is why, if you have a revocable living trust during your lifetime, it need not be irrevocable once you pass away. You can change or revoke the trust at any time if you want to pull certain assets out of the trust or add others in.
Setting up a Living Will
A living will is a legal document that you sign during your lifetime. You can update or revoke it at any time. The process of setting up a living will is usually simpler than setting up a living trust. To create a living will, you typically just need to fill out a form and have it notarized. There are also online software programs available to generate the living will.
Which One to Choose First?
Which one you choose first depends on your personal situation. If you have a lot of assets, it might make sense to set up a living trust first. This will allow you to transfer those assets into the trust and avoid probate. If you do not have a lot of assets, or if you want to leave your home or other property to someone, then you might want to create a living will first.
Changing a Living Trust or Living Will
The beauty of both a living trust and living will is that they can be changed at any time to reflect your current wishes but the process is different for each one. If something changes in your life and you want to update your documents, you can do so with relative ease. A living trust typically requires an amendment that you sign in front of witnesses. A living will can be updated by simply filling out a new form and having it notarized.
When it comes to estate planning, it is important to think about the future and what might happen. Both a living trust and living will can help you to make decisions about your care in advance, and they provide a way for you to communicate your wishes to others. Which document you choose depends on your situation. If you are young and healthy, a living will be sufficient, but as you age or health status changes, a living trust might be more appropriate. In some cases, especially for older or sicker individuals, having both a living trust and a living will make sense.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.