Understanding wills, living trusts, and living wills

A will, living trust and living will are estate planning documents that play an important part in helping ensure your wishes are carried out during your life and after you die. Here’s a look at what each does and why they’re so important.

What happens to your assets after you die depends a lot on how you prepared during your life. If you haven’t prepared at all, state law will determine what happens to your assets. But if you care about providing for your loved ones in a way that aligns with your wishes, it’s important to have certain estate planning documents in place. The primary ones are a will, a living trust and a living will.

What does a will do?

A will is the most common estate planning document that specifies how your assets—such as savings, investments, or property—will be distributed after you pass away. It also lays out the terms under which each beneficiary is to receive your assets. If you have children, you can designate guardians for them in your will.

You name an executor for your will, who will file it with the court and have it validated upon your death. Your property and assets are then inventoried and appraised. Any debts are paid first, and the remaining assets are distributed to designated beneficiaries. This entire court-supervised process is known as probate.

If you don’t have a will, you’re intestate. That means the disbursement of your assets is handled according to the laws of the state where you live. (In other words, you forfeit control of the distribution of your assets after you die.)

If you hold assets jointly with someone else, the assets will pass to the joint owner when you die. However, if they don’t have a will, these assets can once again be handled by the state upon their death. That’s why it’s important that both you and your loved ones have wills and update them periodically.

Despite the importance of having a will, most people don’t have one in place. In fact, according to a recent survey, only 24% of American adults do.¹ But even for those who do have a will, it might not be enough to ensure that their assets are distributed according to their desires and values. 

What does a living trust do?

Unlike a will, a revocable living trust allows you to transfer assets into a trust during your lifetime. You can appoint yourself as the trustee, maintaining control over these assets, or name someone else. If you appoint yourself as trustee, you’ll want to also name a successor trustee to manage the assets if you become incapacitated and at your death.

The biggest advantage of a living trust is that it bypasses probate, meaning the assets can be distributed quickly and privately after your death.

You can fund living trusts with a variety of assets, including:

• Bank accounts
• Certificates of deposit
• Securities
• Mutual funds
• Other types of assets (transferring assets such as tangible personal property, real property or business interests, can be complicated and may require the help of an attorney)

All income from trust assets must be reported on your personal income tax return, but since you are treated as the owner of the trust assets, there are no adverse tax consequences during your lifetime. 

In some cases, you may choose not to transfer assets to the trust, such as items with sentimental value. You can deal with these individual assets in a “pour-over” will, which directs any remaining assets not included in the trust to be transferred to it upon your death. Keep in mind, though, assets passed to a trust through a pour-over will still have to go through probate.

What does a living will do?

A living will is entirely different from a standard will. It isn’t about your assets; instead, it outlines your medical preferences should you become unable to communicate them yourself. Sometimes called an advance directive or a healthcare directive, this document can include instructions on life support, resuscitation, or other health decisions if you’re terminally ill or unconscious.

A living will lifts the emotional burden from your loved ones by providing clear guidance on crucial medical decisions. It is often paired with a healthcare power of attorney, which appoints someone to make medical decisions on your behalf.

Talk with your family, friends and physicians to make sure everyone understands your wishes, and then have the living will prepared, signed and notarized. 

How to start making a will or trust

Typically, if you choose to include a trust in your estate plan, you’ll have a will drafted at the same time. The will ensures that any assets not titled in the name of the trust upon your death will pour over into the trust and be distributed according to its terms.

If you’re writing a will:

• Consult with a financial professional and a qualified attorney. They can help you understand the difference between a will and living will and the different governance laws that make them valid.
• Choose an executor. This person will oversee carrying out your wishes.
• Select guardians for your children, if applicable. You may be able to name several potential guardians, in order of preference, to cover your bases.
• Be specific and realistic about your assets and how you want them divided.
• Find a witness to sign your will.
• Identify a safe place to keep the original copy.

If you’re considering a trust:

• Consult with a financial professional and a qualified attorney. They can help you understand the difference between a trust and living trust, as well as types of trusts, and what might work best for your needs. 
• Be sure to work with your advisors to implement your plan. Without proper implementation, your plan may not be effective in achieving your goals.
• Catalogue your important information. Include assets such as real estate, retirement plans, annuities and life insurance, as well as liquid assets such as bank and savings accounts. 
• Identify a trustee(s) who will have a fiduciary responsibility to manage your assets and distribute them to your designated beneficiaries.
• Identify each beneficiary by name and relationship. This includes any charities or organizations you would like to leave assets to.

Don’t forget to communicate with your loved ones when you’re making financial decisions that affect the whole family.

Make estate planning a habit

Neither a will nor a trust is a one-time document. It’s important to update these documents on a regular basis to ensure they reflect your current assets and wishes.

Certain milestones should motivate you to talk with a financial professional about reviewing the details of your will or trust. For example, if you get married or divorced, have a child, or gain a significant new asset, make sure your new situation is appropriately reflected in your will and/or trust.

All of these estate planning documents play an important part in helping ensure your wishes are carried out during your life and after you die. Your financial professional can work with you and your tax and legal advisors to help you build an estate planning strategy that meets your needs and secures your legacy.

Read more about trust and estate planning.