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Talking Trusts

MoneyWise | May 10, 2022

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Show Notes

There are wills and trusts, living wills and living trusts, and even something called a testamentary trust will. Confused yet? Navigating the legal definitions and requirements for leaving assets to your heirs is a complicated business. We’ll try to clear up some of the confusion today on MoneyWise.

  • Definitions:
  • WILLS: You likely already know that a will is a legal document that details how you want your assets distributed, and possibly your minor children cared for, upon your death.
  • Wills have to be processed through your local probate court, and if you die without one, that court will distribute your assets according to state law. So at the very least, you need a will.
  • LIVING WILLS: A living will is completely different. It has nothing to do with the distribution of assets. Instead, it’s a legal document that specifies medical treatments you would and wouldn’t want to keep you alive … should you become incompacitated. It might also spell out your wishes for other medical decisions, like pain management and organ donation.
  • TESTAMENTARY TRUST: A “testamentary trust will” takes us back to the distribution of assets upon your death. Think of it as a mini-trust within your will or in a separate document that specifies how your assets are to be managed, usually to protect them for minor children. It only goes into effect upon your death.
  • A living trust: Sometimes called a revocable trust, a living trust goes into effect while you’re still alive. It allows you to manage and benefit from your assets during your lifetime. And it’s called “living” or “revocable” because you can change it whenever you want.
  • So it’s different from an ir-revocable trust, which also takes effect while you’re living … but cannot be changed. So you have to be very careful with that one.
  • Since we get so many questions about living or revocable trusts, let’s look at that one more closely. Typically with a living trust, you would designate yourself as the trustee.
  • Technically, you’re changing legal ownership of your assets from yourself to the trustee, which, of course, is still you. And again, that happens while you’re alive and it’s the big difference between a living trust and a will. With a will, nothing legal happens until you die.
  • Then upon your death, the assets in the living trust are transferred to the beneficiaries you’ve named, and that’s done by the person you designate as your "successor trustee."
  • So with a living trust, you’re really not giving up control of your assets. You’re still free to manage manage your assets as you like, but ownership has been legally transferred to the trust. And as the name implies, you can revoke this type of trust, as well, whenever you want and it’s easy to do.
  • Now, who needs a living trust? Well, not everyone, for sure. In most cases, with simple estates, a regular, ol’ will works just fine. But the more complicated your estate becomes, the more likely you are to benefit from a living trust.
  • For one thing, they allow you to distribute your assets to heirs without going through probate … which is why a lot of folks like them. During probate, which is a public process, the court first determines if your will is genuine. It then makes sure creditors are paid and your heirs receive whatever assets you’ve specified in the will. That can take time, and if there’s a problem, your heirs won’t have access to those funds until it’s resolved.
  • But with a living trust, your successor trustee takes care of all that privately, and usually much faster.
  • You’ll have to do a little homework to determine if a living trust is right for you … it may not be. State laws vary, and many states have streamlined the probate process, possibly making a will the better choice. Some have made probate less costly, too, for smaller estates.
  • Also, some assets can be distributed without a will or a trust. These would be retirement accounts with named beneficiaries, joint accounts with survivorship rights, pay-on-death accounts and life insurance.
  • A living trust can solve a lot of problems, like naming someone to manage your assets to benefit your heirs. If you own a business, not having to go through probate means your heirs could have immediate access to funds needed to keep the business operating.
  • But there are also a few “downsides” to a living trust. More paperwork, for one thing. You have to transfer all of your assets out of your name as the direct owner … and into your name as the trustee. That would be things like the deed to your house … and your bank and investment accounts.
  • A living trust is also more expensive to draw up than a will. Where a will might cost you $500, a living trust will run more like $1500. This assumes, of course, that you hire an estate attorney to prepare the documents, which we strongly recommend.

On this program, Rob also answers listener questions:

  • Are there good options to lower the interest rate on a student loan?
  • Would it make sense to put real estate investment money into a rental property?
  • Should your entire tithe go to your local church or can you (biblically) give a portion of the tithe to other charities or causes?
  • Does it make sense to sell a house right now or keep it and refinance?

Remember, you can call in to ask your questions most days at (800) 525-7000 or email them to Questions@MoneyWise.org. Also, visit our website at MoneyWise.org where you can connect with a MoneyWise Coach, join the MoneyWise Community, and even download the free MoneyWise app.

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