Estate planning documents: Living trusts vs. will vs. living will

There are estate planning documents that play an important part in helping ensure your wishes are carried out during your life and after you die. Here’s a look at what each does and why they’re so important.

What happens to your assets after you die depends a lot on how you prepared during your life. If you haven’t prepared at all, state law will determine what happens to your assets. But if you care about providing for your loved ones in a way that aligns with your wishes, it’s important to have certain estate planning documents in place. The primary ones are a will, a living trust and a living will.

What does a will do?

Wills are the most common tool for distributing assets after death. A will specifies your beneficiaries for assets like savings, investments and property. It also lays out the terms under which each beneficiary is to receive your assets.

When you have a will, an executor, personal representative or administrator files it with the court upon your death and has it proved valid. Your property and assets are then inventoried and appraised. Any debts are paid first, and the remaining assets are distributed to designated beneficiaries. This entire court-supervised process is known as probate.

If you don’t have a will, you’re intestate. That means the disbursement of your assets is handled according to the laws of the state where you live. (In other words, you forfeit control of the distribution of your assets after you die.)

If you hold assets jointly with someone else, the assets will pass to the joint owner when you die. However, if they don’t have a will, these assets can once again be handled by the state upon their death. That’s why it’s important that both you and your loved ones have wills and update them periodically.

Despite the importance of having a will, most people don’t have one in place. In fact, according to a recent survey, only 1 out of 3 American adults do.¹ But even for those who do have a will, it might not be enough to ensure that their assets are distributed according to their desires and values. Living trusts can help strengthen your legacy.

What does a living trust do?

A way to potentially avoid probate is to hold some or all of your assets in a trust. The most basic form is a revocable living trust. Assets are placed in the trust to benefit you and/or other beneficiaries. The distribution of assets held in a living trust is not a court-supervised process. That means it’s private, rather than a matter of public record.

You can appoint yourself or another person or entity to be the trustee responsible for managing those assets. If you appoint yourself as trustee, you’ll want to also name a successor trustee to manage the assets if you become incapacitated and at your death.

You can fund living trusts with a variety of assets, including:

• Bank accounts
• Certificates of deposit
• Securities
• Mutual funds
• Other types of assets (transferring assets such as tangible personal property, real property or business interests, can be complicated and may require the help of an attorney)

All income from trust assets must be reported on your personal income tax return, but since you are treated as the owner of the trust assets, there are no adverse tax consequences during your lifetime. In some cases, you may choose not to transfer assets to the trust, such as items with sentimental value. You can deal with these individual assets in your will.

In addition to providing for the distribution of specific assets, a “pour-over” will acts as a safety net for assets that may have remained in your name and are not retitled in the name of the trust. Assets held in trust don’t have to go through probate, so they can be distributed quickly and confidentially. Note that assets transferred into the trust under “pour-over” will provisions are subject to the probate process. 

What does a living will do?

A living will is not the same as a “regular” will. It is a separate document — sometimes called an advance directive or a healthcare directive — designed to address potential future medical issues. (This document is often used in tandem with a healthcare power of attorney, which appoints someone to act on your behalf if you are incapacitated.) A living will lets you spell out specific instructions about your medical care if you were to become terminally ill or permanently unconscious and couldn’t express your wishes.

A living will helps ease the burden on your loved ones if they have to make medical decisions on your behalf. It guides them on how to handle these important decisions based on your wishes — like whether you want to be kept on life support or connected to a feeding tube. Without clear and convincing evidence of your desires in the form of a living will, the hospital might continue life-sustaining measures indefinitely because of fear of liability, a doctor’s moral beliefs or a disagreement within your family about the appropriate response to your situation.

Talk with your family, friends and physicians to make sure everyone understands your wishes, and then have the living will prepared, signed and notarized.

How to start making a will or setting up a trust

Typically, if you choose to include a trust in your estate plan, you’ll have a will drafted at the same time. The will ensures that any assets not titled in the name of the trust upon your death will “pour over” into the trust and be distributed according to its terms.

If you’re writing a will:

• Consult with a financial professional and a qualified attorney. Keep in mind that every state has different laws governing wills and what makes them valid.
• Choose an executor. This person will oversee carrying out your wishes.
• Select guardians for your children, if applicable. You may be able to name several potential guardians, in order of preference, to cover your bases.
• Be specific and realistic about your assets and how you want them divided.
• Find a witness to sign your will.
• Identify a safe place to keep the original copy.

If you’re considering a trust:

• Consult with a financial professional and a qualified attorney who can help you understand the different types of trusts and what might work best for your needs.
• Be sure to work with your advisors to assure that your plan is implemented properly. Without proper implementation, your plan may not be effective in achieving your goals.
• Catalogue your important information, beginning with your assets. Include real estate, retirement plans, annuities and life insurance, as well as liquid assets.
• Identify a trustee(s) who will have a fiduciary responsibility to manage your assets and distribute them to your designated beneficiaries.
• Identify each beneficiary by name and relationship — including any charities or organizations you would like to leave assets to.

Don’t forget to communicate with your loved ones when you’re making financial decisions that affect the whole family.

Make estate planning a habit

Neither a will nor a trust is a one-time document. It’s important to update these documents on a regular basis to ensure they reflect your current assets and wishes.

Certain milestones should motivate you to talk with a financial professional about reviewing the details of your will or trust. For example, if you get married or divorced, have a child, or gain a significant new asset, make sure your new situation is appropriately reflected in your will and/or trust.

All of these estate planning documents play an important part in helping ensure your wishes are carried out during your life and after you die. Your wealth planner will work with you and your tax and legal advisors to help you build an estate planning strategy that works for your needs and secures your legacy.

Read more about trust and estate planning.