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A financial advisor explaining the differences between a living trust and a will to clients.

A financial advisor explaining the differences between a living trust and a will to clients.

Today’s choices shape the future for children, great-grandchildren and future descendants. For Californians, navigating the landscape of living trusts and wills is paramount in ensuring a seamless asset transition and safeguarding family members’ well-being. Each of these legal instruments carries advantages and considerations, offering distinct avenues toward realizing your legacy. Read on to equip yourself with the knowledge to make informed decisions that bear fruit for generations to come. You may also talk to a financial advisor who can help you determine the right estate planning tool for you.

Living Trusts in California

When you place assets in a living trust, they are separate from your estate and can be distributed directly to the beneficiaries specified in the trust document upon your passing. Trusts are private documents that offer more flexibility in how you can structure the distribution of your assets. Here are the benefits of having one if you live in California:

Advantages of Living Trusts in California

A senior couple comparing the differences between a living trust and a will with a financial advisor.

A senior couple comparing the differences between a living trust and a will with a financial advisor.

Firstly, living trusts provide asset protection in California by avoiding probate. Typically, if someone passes away and leaves only a will, their assets are subject to probate review. This process can drag on because of court requirements, such as petition filing and mandatory public notice statements.

In addition, parties you don’t mention in your will can attend probate court and challenge the will’s asset distribution. Living trusts solve these issues by eliminating probate altogether and appointing a trustee to distribute your assets as you wish.

Next, living trusts give you control of your assets. Specifically, you (the grantor) appoint yourself as the trustee while you are alive. You also appoint a trustee to take control after you pass away or become incapacitated. This way, you retain control of your wealth during your lifetime, and your trustee will continue managing your wealth if you’re no longer able. Plus, the trust can define the conditions for your heirs to receive their inheritance. For example, you may want your grandchildren to reach adulthood before receiving their share.

Lastly, living trusts become irrevocable trusts when you pass away. This change helps your beneficiaries because irrevocable trusts are exempt from estate taxes. Irrevocable trusts are impervious to claims from creditors, meaning that any debts you leave behind won’t eat into the trust.

Disadvantages of Living Trusts in California

Living trusts in California also have some downsides. For example, they are more expensive and require more time to create than a will. Furthermore, they are more complex than wills, meaning you must hire a professional to create one.

In addition, retirement accounts usually can’t go into a trust because the government considers the transfer as a withdrawal, triggering penalties and taxes. As a result, retirement account holders must use other vehicles (such as a will) to spell out who is to inherit an IRA, 401(k), or 403(b).

Finally, trusts can’t appoint guardians for minor children. You’ll need a will to do that, meaning a will and a living trust can work together to provide a comprehensive plan for your beneficiaries.

Wills in California

A will is a document declaring your desires for your possessions, pets and family members after you pass away. Your will goes into effect when you sign it in the presence of two witnesses who can verify that you were of sound mind when you wrote it. Here are the advantages and disadvantages of wills in California:

Advantages of a Will in California

Having a will means you leave directions for a probate court to follow after you pass away. For example, dying intestate (without a will) means the court will follow California state laws to distribute your assets and assign court guardianship. Conversely, the probate court can instead read your will after you pass away and follow it to the best of their understanding. As a result, the probate court is much more likely to confer assets to your intended beneficiaries, put your children in the care of those you prefer, and prevent a prolonged, expensive probate process.

A will can also declare your intentions for your burial. A trust cannot do this, making a will an indispensable tool for long-term financial planning. In addition, you’ll assign guardians and caretakers for your minor children and pets, ensuring they receive care from the parties you deem most able.

Your will is a catch-all document for the proceedings after your death. Its orders can reinforce your intentions for your trust and help dispel any confusion or disputes between family members. However, it is subject to interpretation by a probate court. Therefore, precise language and frequent updates are necessary to ensure that it carries out your intentions.

Disadvantages of a Will in California

Wills go through probate court, meaning the court process will incur fees for statutory attorneys and executors. The grantor’s estate will pay the fees, which are charged as follows:

  • 4% on the first $100,000

  • 3% on the next $100,000

  • 2% on the next $800,000

  • 1% on the next $9,000,000

  • 0.5% on the next $15,000,000

  • Amounts above $25,000,000 receive a customized rate from the court

Additionally, the probate process opens up the will to the public, so family members and other parties can claim an interest in your estate. As a result, your will is vulnerable to misinterpretation by the court and attorneys of interested parties to whom you don’t intend to pass on wealth.

Wills also don’t allow the same specifications for your beneficiaries as a trust. For instance, a trust can hammer out the details about your beneficiaries reaching adulthood before receiving their inheritance, while wills don’t provide the same precision.

Furthermore, the stipulations of your will won’t apply if you’re incapacitated. Conversely, a living trust can direct your trustee about how to manage your assets if you become incapacitated.

Living Trust vs. Will in California: Key Differences

The following distinctions highlight the advantages and considerations of choosing between a will and a revocable living trust in estate planning:

  1. Privacy: Wills are part of public records, so anyone can review probate records and see their contents. On the other hand, trusts are exempt from probate. Therefore, they remain private and are known only to you, the trustee, and the trust beneficiaries.

  2. Flexibility and control: Trusts provide more flexibility and control than wills. A will declares who you want to receive specific assets, and you have limited control over when the beneficiary receives them due to the probate process. On the other hand, you can transfer assets to a revocable living trust at your discretion, including setting conditions for distribution.

  3. Contestability: Wills are more easily contested in probate. Interested parties can challenge the enforceability of a will on various grounds. Although beneficiaries can contest trusts, they usually receive less resistance when they go into effect.

  4. Cost: Trusts are usually more expensive to create than wills, and you may also need to pay a trustee to manage your assets.

  5. Guardianship and personal representative: Wills are the sole tool for appointing a guardian for your minor children and a representative for your estate. Trusts don’t involve the probate process, so they do not facilitate these tasks.

Living Trust vs. Will in California: Which One Do You Need?

Here’s a summary of how to determine whether you need a living trust or a will in California. Consider a living trust if you:

  1. Want to avoid probate: Living trusts allow assets to be distributed directly to beneficiaries without going through the probate process, which can be time-consuming and costly.

  2. Value privacy: Trusts are private documents, whereas wills become public records when they go through probate.

  3. Seek flexibility and control: Trusts offer more control over how and when beneficiaries receive their inheritances compared to wills.

  4. Want to provide conditions for inheritance: Trusts allow you to specify conditions for when and how beneficiaries receive their inheritances.

  5. Need to protect assets from creditors: Assets in an irrevocable trust become exempt from estate taxes and are protected from creditor claims.

  6. Have complex assets or distribution plans: Trusts can be more suitable for complex estates with various assets and specific distribution instructions.

On the other side, consider a will if you:

  1. Want a straightforward, inexpensive document: Wills are relatively simpler and more cost-effective to create when compared with trusts.

  2. Need to name guardians for minors: Wills are necessary to appoint guardians for minor children, a function that trusts do not serve.

  3. Have a modest estate and simple distribution wishes: If your estate is relatively straightforward and you have simple distribution preferences, a will may suffice.

  4. Want to specify funeral and burial wishes: Only wills can be used to declare intentions for burial.

  5. Want to make immediate changes: Wills are easier to amend, making them suitable if you anticipate frequent updates.

Keep in mind that because trusts and wills have distinctive functions, it’s usually best to have both. For example, your will can provide directions for your retirement accounts (which don’t go into a trust) and guardianship for minors. In addition, your trust can specify the conditions for how and when your beneficiaries receive distributions from your estate, even if you become incapacitated.

Bottom Line

A couple deciding between a living trust and a will.

A couple deciding between a living trust and a will.

Choosing between a living trust and a will in California hinges on various factors that reflect your individual circumstances and preferences. A living trust offers significant advantages, such as avoiding probate, maintaining privacy and allowing for precise control over asset distribution. On the other hand, wills play a crucial role in naming guardians for minors and can serve as an essential catch-all estate planning document for your intentions.

Tips for Living Trusts and Wills in California

  • Shifting tax codes, complex family dynamics and evolving financial circumstances can complicate the creation of a trust or will. Plus, telling whether each is necessary can be challenging. A financial advisor can help you construct detailed documents for these purposes. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

  • A living revocable trust is an excellent tool, but other types of trusts can help you ensure your wealth is managed to your specific expectations. For example, a generation-skipping trust will distribute all your wealth to your grandchildren, while your life insurance policies can go into a unique trust of their own.

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The post Living Trust vs. Will in California: Differences and How to Choose appeared first on SmartReads by SmartAsset.

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