What happens when we die? Or when we are still alive but unable to make decisions for ourselves?
This question is not about religion or spirituality – we are talking about pure practicality.
If either of these situations happens and you are not prepared, then your loved ones have to foot the bill and jump through legal hoops.
If you do not want to put that sort of (additional) stress on your loved ones in their time of grief, you can prepare these documents beforehand.
Here is what you need to know about estate planning.
What Is a Living Trust vs. a Will?
A lot of people get confused when it comes to the differences between a living trust and a will.
A living trust is a document that gives directives and transfers ownership of your assets to designated beneficiaries.
Your living trust can help skip the drawn-out probate process while also giving a trusted family member or friend permission to make certain estate related decisions on your behalf if you cannot make them yourself.
On the other hand, a last will and testament is only valid once the medical examiner has provided a certificate of death. In short, the person that is the subject of the will, dies. After death, the will dictates what should occur with the deceased’s estate. Though any contention, or items not addressed, may be contested in probate.
You can imagine, dying without a will, or with a poorly drafted will is a big pain for those who survive you, especially since they will have to jump through hoops while they are still grieving your loss.
Moreover, it is expensive to die without these documents in place. Your survivors will have to pay the legal fees involved in probate, and they may disagree over your asset distribution, which could create years of legal issues.
What Does a Living Trust Do?
A living trust gives instructions on what to do if you are unable to make decisions for yourself. It is not a medical directive – though you may write that the same time as you write your trust.
Living trusts are more about asset management and legal ownership rights.
For example, if your loved one does not have the right to make decisions on behalf of your business, it could create havoc if you become incapacitated. Addressing this in your living trust can be a way to bridge ownership and keep the “lights on.”
Types of Living Trusts
There are two main types of a living trust, one more complex than the other.
Revocable Living Trust:
If you are still young and you do not expect to go any time soon, you can make a revocable living trust. In this trust, you put your assets in the trusts name.
You are a manager of the trust, so to speak, and whoever is appointed will get management rights if you are incapacitated.
If that person upsets you or proves that they are not responsible, you can revoke their rights to access the trust and make financial decisions on your behalf.
Irrevocable Living Trust
On the other hand, an irrevocable living trust is permanent. You write your assets into the trust, and they stop being part of your estate – they are now owned within the trust.
That trust is “owned” by whomever you designate – like grandkids or children.
Irrevocable living trusts are rare since they involve you signing away your rights to that asset. But in some circumstances, like advanced chronic illnesses, they make financial and tax planning sense.