The difference between estate planning and a revocable living trust is the difference between a jigsaw puzzle and a single puzzle piece. Your estate planning may include a trust, but it will probably include other elements such as a will, a 401(k) and pay-on-death bank accounts. Depending on your finances, a trust may not be part of your estate plan at all.
An estate plan spells out what you want to happen to your property when you die: who inherits what, whether some of your estate goes to charity and so on. A will is the basic tool for this, but naming beneficiaries on your IRA and 401(k) is also part of estate planning. If your estate is large enough to be hit with estate tax, your plan can also include ways to minimize the tax bite.
When you transfer ownership of your assets -- real estate, stocks, bonds -- to a living trust, you name a beneficiary to inherit when you die. Assets in a revocable living trust aren't protected from estate tax, but they do bypass probate; assets you pass on in a will do not. If you plan to leave property to minors, you can set up the trust to manage it for them until they reach adulthood.
A revocable living trust, by itself, isn't usually a complete estate plan. It doesn't affect any assets you buy later unless you remember to transfer them to the trust. Many people forget. You can't use a trust to name a guardian for your children or an executor for your will. If you have specific instructions about paying debts or taxes, a will can convey your wishes but a trust declaration cannot.
If you live in a state with a speedy, simple probate process, you may not need a living trust. If most of your big assets are tied up in retirement accounts or pay-on-death bank accounts, there may not be enough left to bother including a trust in your estate planning. The more complex your estate or the more important it is to avoid probate -- you want ownership of your company to transfer quickly, for instance -- the bigger the role a living trust can play.
- What Is the Difference Between Irrevocable & Revocable Trust?
- Key Steps for the Creation of an Estate Plan
- How to Dissolve a Testamentary Trust
- Should a Checking Account Be in a Revocable Trust?
- What Does a Bank Require When Opening a Trust Account?
- Do I Need a Trust if I Am Married With No Kids?
- How to Leave a 401(k) to Charity
- What Are the Pros & Cons of Wills vs. Trusts?