Living Trust vs. Will

Since they both state who gets the inheritance, a very common question is, “Do I need a Will or a Living Trust?” Although there can be a number of reasons to choose one or the other, the two main factors to consider are the value of the person’s estate at death and the desire for beneficiaries to avoid the potentially costly and time-consuming process known as probate.

What is Probate?

In order to evaluate the need between a Will or Living Trust, it is first necessary to have a general understanding of what probate is. Probate is a court process that many families may go through to receive their inheritance. Very simply, when someone dies and if they own assets in their name at the time of death, a judge needs to make an order who the new owner is going to be. That’s it; that’s the goal. But, like most everything that goes on in our country’s court system, something that seems so simple can become a whole drawn-out process. Most people that have gone through probate feel the two biggest disadvantages are the cost and time to get through it.

Cost

Since beneficiaries are commonly not lawyers or familiar with court procedures and probate law, many of them decide they need the help of an attorney. Between the attorney and court costs, expenses may average 4% to 5% of the typical estate¹. 4% to 5% may not seem like too much, but let’s put that into an example of a person’s estate valued at $500,000 (their home, furnishings, vehicles, savings, etc.). 4% to 5% of $500,000 is $20,000 to $25,000 in expenses. This amount of expense doesn’t usually sit well with most people. They would rather have all of their money go to people they care about; the beneficiaries of their choosing.

Time

On average, the probate process may take 6 months, and sometimes 1-year or more. About 75% of the people going through probate fall into this range of 6 months to 1-year. What can cause it to go longer? Court delays for one. Also, it’s not uncommon for beneficiaries to fight over the money and it ends up taking time for the judge to decide who gets what. It only takes one person, one family member or in-law who thinks their spouse deserves more, to start the fight and send the family into turmoil. Additionally, assets in probate can not be accessed or utilized by the beneficiaries during probate.

Who must go through Probate?

Not everyone has to go through the probate process. It generally depends on the value of the estate at the time of death. It varies by the state in which the person lived, but there is usually a minimum amount. In many states, estates valued as low as $22,000 and up to only $166,250 (both real and personal property) generally have to be probated. Therefore, avoiding probate is not just an issue for the wealthy. In fact, just owning a home can often exceed the minimum and require the estate to file for probate.

What About Wills?

Sometimes a Will is sufficient to pass on an inheritance, but in many instances, it is not. If at the time of death, a person owns less than the minimum amount of assets required for probate, then a Will is generally sufficient to pass an inheritance since there is no probate. But, if a person’s estate value is over the minimum, a Will usually does not prevent the assets from going through probate. The Will is actually filed with the probate court and the judge will attempt to follow the wishes of the person who wrote the Will.

The Living Trust

A living trust is similar to a Will in that it is also just written instructions as to who receives an inheritance when the time comes. However, a living trust goes into effect immediately when it is created, unlike a Will that’s use isn’t triggered until after death occurs. A trust follows laws that state assets shall be granted to the beneficiaries immediately upon the death of the owner (death of the second spouse if a married couple owns a trust together). Assets protected through the use of a living trust avoid the probate process entirely, hence saving families time and legal costs. Living trusts are not just for the wealthy. If a person wants their heirs to avoid probate, and their assets are over the state’s minimum allowable to avoid probate, the use of a living trust is generally preferred over that of a Will.

Cost of a Living Trust

The cost of a living trust can sometimes vary from service to service. We’ve put together a Living Trust cost and service comparison to show the differences. Click here to learn how to obtain a Living Trust for $599.  

¹IRS Statistical Studies; Estate Planning Concepts Life and Health Continuing Education Course, Ninth Edition, 2006