Estate planning is the process of arranging for the distribution of one’s assets and affairs after death. It’s an essential part of financial planning, as it ensures that one’s estate will be distributed according to their wishes and can help avoid conflicts and legal battles among heirs. In this post, we’ll explore the importance of estate planning, the main options available, the differences between a will and a revocable living trust, and the circumstances in which one might consider using one over the other.

The Importance of Estate Planning

Estate planning is important for several reasons. First and foremost, it allows an individual to control how their assets will be distributed after their death. Without an estate plan, one’s assets will be distributed according to state law, which may not reflect their wishes or preferences. Second, estate planning can help minimize taxes and other expenses, which can reduce the number of assets available for distribution. Third, estate planning can help avoid disputes and conflicts among heirs, which can be costly and time-consuming.

Main Options for Estate Planning:

The main options for estate planning include a will, a revocable living trust, and other documents like powers of attorney, healthcare directives, and beneficiary designations. Each option has its own advantages and disadvantages, depending on the individual’s circumstances and preferences.

Wills and Revocable Living Trusts

A will is a legal document that specifies how an individual’s assets will be distributed after their death. It can also name guardians for minor children and specify funeral arrangements. A will goes into effect only after an individual’s death and is subject to probate, which is a court-supervised process that ensures the will is valid and the assets are distributed according to its terms.

A revocable living trust, on the other hand, is a legal entity that holds an individual’s assets during their lifetime and specifies how those assets will be distributed after their death. A revocable living trust is “revocable” because it can be changed or terminated by the individual during their lifetime. Unlike a will, a revocable living trust does not go through probate, which can be a lengthy and expensive process.

Differences between Wills and Revocable Living Trusts

There are several differences between wills and revocable living trusts. First, a will only goes into effect after an individual’s death, while a revocable living trust is effective during the individual’s lifetime. Second, a will must go through probate, while a revocable living trust does not. Third, a will is a public document that can be viewed by anyone, while a revocable living trust is a private document that is not publicly available.

Living Trust	Will
Takes effect while you’re alive	Takes effect at death
Skips probate court	Goes through probate court
Harder to change	Easy to change
Does not involve guardianship	Names guardianship of children
Assets transfer immediately	Transfer of assets can take time
Stays Private	Becomes public
Can involve expensive fees	Affordable

Choosing Between a Will and a Revocable Living Trust

The choice between a will and a revocable living trust depends on several factors. If an individual has a relatively simple estate and wants to keep costs low, a will may be sufficient. However, if an individual has a complex estate with multiple assets and beneficiaries, a revocable living trust may be a better option. Additionally, a revocable living trust can offer greater privacy and flexibility, as well as the ability to manage assets during an individual’s lifetime if they become incapacitated.

Can You Have Both a Will and a Living Trust?

Yes, you can have both a Will and a Living Trust because they do two different things. Trusts provide for the management and distribution of your assets during your lifetime and after death. A Will, on the other hand, allows you to do things like name guardians for your children, appoint an executor for your estate, and declare your final wishes. So what’s actually more crucial to understand is the type of Will to have with a Living Trust so that you can have the most comprehensive Estate Plan. 

Let’s say you have both a Last Will and a Living Trust. This is not necessarily recommended and here’s why: The assets that are included only in your Last Will are likely to go through an extensive probate process. Not to mention, Last Wills are public documents.  Conversely, the assets included in a Trust are typically protected from probate court.

Most Revocable Living Trusts include what’s called a Pour Over Will, which is a type of Will designed to work in conjunction with your Trust. With a Pour Over Will, anything a person owns outside of their Trust — as well as anything that is subject to their Last Will — will be paid to your Trust at the time of your death. Pour Over Wills essentially act as a backup plan to ensure all of your assets go under your Trust.

Note that a Living Will is also different from a Last Will and a Pour Over Will (and yes, we know the names can get confusing). A Living Will refers to a set of documents related to an individual’s medical decisions. Included in those documents are: 

• Medical Power of Attorney 
• Advanced Health Care Directive
• HIPAA Authorization Form 

Estate Planning May Be Covered by Your Employer

When considering estate planning, it is important to check whether your employer offers coverage for this benefit. In our case, we were fortunate to have this benefit included in our package, but we had to wait for the annual enrollment period to opt-in. While there was a slight increase in our total annual deduction due to the premium, it was still a cost-effective option compared to creating a will or trust from scratch.

We received a list of law firms within our network that offered estate planning services. After conducting our due diligence, we decided to work with a firm that had a strong track record – having been in business for over 10 years – excellent reviews, was conveniently located, and had experience creating wills and trusts.

However, in retrospect, we realized that we could have benefited from investing in estate planning literacy and understanding the fundamentals of wills and trusts. This would have helped us to have a more productive discussion with our lawyer and make a better-informed decision on the best option for our family. While it is true that lawyers are there to educate you, relying solely on them can be costly in terms of both time and money.

The Mistake of Creating A Will

During our initial meeting, we introduced ourselves, discussed our reasons for creating an estate plan for our family, and clarified expectations of the process. One of the key objectives of the meeting was to determine whether a will or trust was the better option for us. Our lawyer explained the main differences between the two, and we ultimately decided on a will due to its simplicity. We were also reassured by the fact that we could always update the will or switch to a trust if our financial situation changed. After several meetings, and a few back-and-forths to make corrections, we received the following notarized documents:

• Living Will (one per spouse)
• Financial Power of Attorney (one per spouse)
• Medical Power of Attorney (one per spouse)
• Guardianship Appointment
• Parenting Power of Attorney

In hindsight, we should have favored and requested the creation of a living trust when we initially met with our lawyer, especially given that we own rental properties in three different states. This would have been a more appropriate and effective solution for our estate planning needs, and could have helped us avoid the potential challenges and expenses of going through probate in multiple states.

Switching to A Revocable Living Trust

About a year or two after our initial estate planning meeting, the topic came up again during a financial independence meetup. I found the conversation particularly interesting, especially when most individuals favored a revocable living trust over a will. This was surprising to me, but one of the key takeaways that stuck with me was the importance of avoiding probate, especially if you have out-of-state real estate.

I learned that if you pass away and your assets are held in a will and you own real estate in different states, your assets will have to go through probate in each state. As out-of-state real estate investors, this was a major concern for our current estate planning situation.

Furthermore, a friend recommended the book “Living Trusts for Everyone,” which proved invaluable in simplifying the complex concepts of estate planning for us. In hindsight, it would have been beneficial to have read the book before our initial meeting with the lawyer. To this day, I have no clue why our lawyer did not suggest a living trust, considering we had rental properties in different states.

We contacted our lawyers and decided to switch to a revocable living trust. We were fortunate to have employee benefits that covered this change; otherwise, we would have had to bear the cost of creating a will first and then switching to a living trust. My estimate is that our will was ~$2500 and our Trust was likely twice that.

Funding the Trust Is Critical

So you now have a revocable living trust that allows you to transfer ownership of your assets into the trust. When you pass away, the assets in the trust will be distributed to your beneficiaries without going through probate, which can save time and money and provide greater privacy. However, simply creating a revocable living trust is not enough.

To ensure that your assets will be distributed according to your wishes it is important to fund the trust by transferring ownership of your assets into it.

This means that you need to retitle your assets in the name of the trust, which can include bank accounts, real estate, stocks, and other investments.

Failing to fund your revocable living trust can result in your assets being subject to probate, which defeats the purpose of creating one, to begin with. If your assets are not titled in the name of the trust, they will be subject to the probate process and distributed according to state law rather than your wishes.

In addition, funding your trust can provide greater control and flexibility in managing your assets during your lifetime. By transferring ownership of your assets into the trust, you can continue to manage them as the trustee or appoint a successor trustee to manage them for you in the event of your incapacity.

Estate Planning Literacy

Investing in estate planning literacy is a wise decision that can save you and your loved ones from potential financial and emotional stress in the future. Living Trust for Everyone is a valuable resource that can help you understand the benefits of a living trust and guide you through the process of creating one. Visit your local library or get a copy online. Trust me, it’s a decision you won’t regret.

Final thoughts

Estate planning is an essential part of financial planning that allows individuals to control how their assets will be distributed after their death. The main options for estate planning include a will and a revocable living trust, each with its own advantages and disadvantages. Ultimately, the choice between the two depends on an individual’s circumstances, preferences, and estate complexity. In the case of a revocable living trust, funding is critical to (a) ensure that your assets are distributed according to your wishes, (b) avoid probate, and (c) provide greater control and flexibility in managing your assets during your lifetime.

Until next time,

JJ