In this article, we will discuss the factors and circumstances to consider when deciding whether to use a will or a revocable living trust. Regardless of the net worth of your estate, you should consider creating a revocable living trust if you anticipate the need for planning for potential mental incapacitation. A good living trust should contain provisions to define your mental capacity outside of a judicial process, as well as how to care for you and your finances if you become unable to make decisions. These provisions will save you and your family thousands of dollars by keeping your assets out of court-controlled probate.
Mental Incapacity
Regardless of the net worth of your estate, especially if any of your assets are titled in your name alone, you should consider creating a revocable living trust if you anticipate the need for planning for potential mental incapacity. One requirement for a valid will is that the person who created it must be of sound mind. A trust contains measures to protect against the possibility of being voided due to mental incapacity. However, not all revocable living trusts are alike.
Minor Beneficiaries
Often, the largest asset for young parents is a life insurance policy or a retirement account, such as an IRA or 401(k) through work. This becomes an issue if young parents later divorce and one wishes to name their minor children as primary beneficiaries or if both parents die while the children are still minors. What will happen to the life insurance policy or retirement account?
The funds will be placed in a probate court-controlled guardianship for the benefit of the minor until the child reaches the age of majority. In these cases, parents should consider creating a revocable living trust and naming the trust as the primary or contingent beneficiary of the life insurance policy or retirement account. This way, the trustee can accept the funds instead of having them go through court-controlled probate. Additionally, the parent can specify in the trust when the children will receive their inheritance, such as at age 25 or 30 instead of 18.
Single Individuals
Any single person with assets titled solely in their name should consider creating a revocable living trust. The two main reasons are to keep yourself and your assets out of court-controlled probate, and to allow beneficiaries to avoid the costs and hassles associated with probate.
Note: If your assets exceed the minimum threshold in your state, this would require a formal probate process, which can take time and be costly. The minimum net worth needed for a single person to consider using a revocable living trust will vary from state to state. For example, in Florida, estates valued at $75,000 or less are considered small enough to be administered through a simple streamlined probate process. In California, this threshold is $166,250; and estates of this size or larger are managed through formal probate.
Married Couples
If you are married and your combined estate exceeds the federal estate tax exemption of $12,060,000 in 2022 (up from $11,700,000 in 2021), or the estate tax exemption in your state (which can be lower than $1,000,000), you should consider creating a revocable living trust to take advantage of estate tax exemptions for both spouses. This is typically done by establishing AB or ABC trusts and then dividing the assets roughly equally between the two trusts.
Note: The newer concept of “portability” allows the surviving spouse to use the unused portion of the deceased spouse’s exclusion for federal estate tax exemptions. You will also need to engage in this type of planning to maximize the use of estate tax exclusions for both spouses, which cannot be accomplished solely through portability. It should also be noted that while this type of tax planning can be done in your wills, you and your spouse will need to split your assets into separate titles, in which case the assets would require probate after the death of each spouse. Using revocable living trusts ensures that probate can be avoided after the death of each spouse.
Married Couples
In Second or Subsequent Marriages
If you are in a second or subsequent marriage and you and your spouse have different beneficiaries such as your children or grandchildren, you should consider establishing a revocable living trust to ensure that each spouse’s inheritance goes where they want it to outside of the probate process.
Privacy Concerns
A will that is submitted to the court becomes a public record that anyone can read. This contrasts with a revocable living trust, which is a private contract between you as the trust creator and as the beneficiary. Unless the beneficiaries have to go to court over something written in the revocable living trust agreement (like the heirs of Michael Jackson), the document should remain a private document that can only be read by the trustees and some beneficiaries after your incapacity or death.
Properties Outside Your State
If you own property in more than one state, you will need to create a revocable living trust and title the out-of-state property in the trust. Otherwise, your family members may face two separate probate issues – one in the state where you live and another in the state where your property is located, which is referred to as “ ancillary probate.”
Final Thought: Trusts Don’t Work If They Aren’t Funded
Of course, if you find yourself in need of a revocable living trust, be sure to fund your assets into the trust and update your beneficiary designations, otherwise your trust will be of little value compared to the money you spent on it.
Frequently Asked Questions (FAQs)
What is the main difference between a revocable trust and a will?
The main difference is that a will requires probate to pass your assets to the chosen beneficiaries. The contents of your will (and by extension, your chosen beneficiaries and the extent of the property you leave to them) become a matter of public record once submitted to the court to open probate.
What if I die without a will or trust?
Your assets will pass to your heirs according to a hierarchy known as “intestate succession” if you have left no estate plan at all. Every state has its own intestate succession list, but surviving spouses are always first in line, followed by children. Distant relatives may receive what they are not entitled to. There are exceptions for property that passes to a living beneficiary by law, such as retirement accounts or other savings accounts that name a beneficiary.
Can I have both a living trust and a will?
Yes, you can, but the terms of your trust will supersede your will regarding the estate if the same asset is left to different beneficiaries. The asset is owned and titled to the trust once transferred to it, so you are not free to give it to anyone else in your will. However, the will can control the disposition of assets that are not listed in the trust, and you can create a “pour-over will” to transfer your assets to the trust as well if you haven’t already done so.
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Sources:
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
Sources:
Online Sunshine. “Chapter 735. Probate Code: Small Estates.”
California Courts. “Estates That May Need Formal Probate.”
Internal Revenue Service. “Estate Tax.”
The American College of Trust and Estate Counsel. “State Death Tax Chart.”
Internal Revenue Service. “Instructions for Form 706-GS(T) (11/2019).”
American Bar Association. “Revocable Trusts.”
American Bar Association. “Introduction to Wills.”
American Bar Association. “The Probate Process.”
Source: https://www.thebalancemoney.com/will-or-revocable-living-trust-what-do-you-need-3505173
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