Should You Choose a Living Trust or Standard Will?

Recently, we received an email from a couple saying the following:

We would love to have a segment on the pros and cons of a revocable living trust vs. a standard will in relation to [things like] IRAs, life insurance, etc. Some brokerage firms don’t allow a trust to be the beneficiary of an IRA, and yet having assets outside the trust seems to defeat the purpose of having a trust. [It’s] all very confusing.

So, when it comes to estate planning, do you need a living trust or does a standard will work just as well?

With just a standard will, all assets that go through the will are subject to what’s known as probate, which is the legal process for distributing your property after you die. Probate can be expensive and time-consuming, so it’s almost always better to avoid it when possible.

One great way to avoid probate is to have a living trust, where your assets like properties, bank accounts, stocks, bonds, and so forth are transferred to the trust while you’re still alive. Then when you die, your assets are more quickly and easily distributed to your designated beneficiaries by a representative that you choose (someone known as a successor trustee).

A living trust avoids probate and the costs that go with it, and unlike a will, which is public record, your assets are distributed privately. A living trust can also add a level of control over your beneficiaries, which is very important in some cases.

Remember that if you use a trust, you will still have a will. It’s called a pour-over will, and it handles anything that’s not actually titled in the trust’s name. The will, for instance, is where guardians are named. So really it’s not a question of a will OR a trust. The question is whether you should you have a will by itself or a trust and pour-over will combination.

Now let’s address IRAs and life insurance.

IRAs have beneficiary assignments on them, so they avoid probate already and don’t need to be in a trust UNLESS you want to put controls on how the beneficiaries get the money.

Naming the trust as the beneficiary of an IRA can create flexibility issues for the beneficiaries, but if control of your assets is important to you then this might be a good option.

If you name the trust as the beneficiary of a life insurance policy, the money goes into the trust without probate and then the net assets of the trust pass to the trust’s heirs, also without probate. But if you die with a negative net worth and you owe more than you have, the cash from the life insurance will first be used to pay off your debts. If you just name an heir as the beneficiary, then the life insurance is not responsible for paying the debts of the trust.

This is a lot of information. But like most everything else in retirement and estate planning, you’ve got many options. Choosing which option is best for YOUR goals is just one of the things we help folks do every single day here at Lucia Capital Group. We’re always here for you. Just give us a call!

Information presented should not be considered specific tax, legal, or investment advice. You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.

No client or prospective client should assume that the presentation (or any component thereof) serves as the receipt of, or a substitute for, personalized advice from LCG or from any other investment professional.

IRA withdrawals will be taxed at ordinary income rates. Withdrawals prior to age 59½ may also be subject to a 10% penalty tax.

Insurance product guarantees are subject to the claims-paying ability of the issuing insurance company, and are subject to their terms and conditions. Insurance products offered through Lucia Securities, LLC (CA Insurance Lic. #0H40817). Lucia Securities is licensed to offer such insurance products as life, disability, long-term care, and annuities. Lucia Securities is also a registered broker/dealer, member FINRA/SIPC, and the dba for Lucia Insurance Services. Lucia Capital Group is a registered investment advisor and the holding company for Lucia Securities.

Raymond J. Lucia Jr. is chairman of Lucia Capital Group, a registered investment advisor and CEO of its affiliated broker-dealer, Lucia Securities, LLC, member FINRA/SIPC. Advisory services offered through Lucia Capital Group. Securities offered through Lucia Securities, LLC. Registration with the SEC does not imply a certain level of skill or training.

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