Estate planning involves wills, living trusts, powers of attorney, health care documents, guardianship nominations and more. A very common question I get is, "Rob, what is the difference between a will and a living trust?" Here are the main differences.
A will
- Takes effect only at death
- Generally must go through probate
- Court-supervised; public documents
- Probate fees can be about 5% of the gross estate
A living trust
- Created during your lifetime
- You keep control of the assets
- Assets avoid probate
- Distribution is quicker and private
What a will is
I tell clients a will is basically a letter to the judge. It says, "Dear Judge, I'm dead. The following people are to get my stuff. My cousin Louis gets this, my cousin Sally gets that, my brother Tommy gets this and my baseball card collection goes to so-and-so."
Who runs it.
The person in charge of a will is the executor. You pick your executor, and generally you want to pick one person and then name a successor executor in case that person cannot do it.
When it takes effect.
As a general rule, a will goes into effect only after you die. While you are alive it does not do you much good. After you die, your executor reads the will and carries out what it says.
Guardians for children.
Besides giving away assets, you can name guardians for your minor children in a will. In California, minors are children under 18. A will is often the place to say who should take care of your kids if you die or cannot care for them. You can also do a separate guardianship nomination.
What a living trust is
A living trust can be made by one person or by two, such as a married couple. It is similar to a will in that it says who you are, what you own and where you want your stuff to go when you die.
Who runs it.
The person in charge of a living trust is the trustee. At first you are your own trustee. My wife and I are the trustees of the Mansour Family Trust, and after I die she will be the trustee. "Successor trustees" wait in the wings to mind the store if my wife and I can no longer do it, or if one person can no longer be the trustee.
When it takes effect.
A living trust is effective the day you sign it. It is "living" from that day, like creating your own little corporation that exists that day and continues after your death.
Court, cost and privacy
A living trust distributes your assets without going to court. A will often means going to court, where a judge has to get involved. If you have a very small estate, you may not need to go to court and can handle it outside the court process.
But much of the time you end up in court, with a judge handling the administration of your will. That can take a lot of time and cost a lot of money. It is also a public affair. Because it is in the court system, everyone can know your business, and a will is a lot easier to contest than a living trust.
Everything in the name of your trust stays outside the court system. "Inside" the living trust means the asset's title has been changed. Your bank accounts no longer say "John and Mary Smith." They say "Smith Family Trust," and your real estate deed says "Smith Family Trust." Everything inside the circle avoids the court system. That keeps your affairs private and keeps courts and judges out. Your trustees handle your assets and their distribution according to the rules of your living trust.
Many other documents work in connection with a living trust, but that is beyond this lesson.