COMPARING LIVING TRUSTS AND WILLS
NEITHER DOCUMENT RESOLVES ALL YOUR AFFAIRS
When a person dies, certain matters have to be taken care of by somebody ‑ lawyer or not ‑ whether there’s a Will, Trust or neither one. First, there is the funeral. Then, bills have to be paid; personal business and insurance matters must be concluded. Final personal income tax and inheritance tax returns must be filed, as well as a federal estate tax return, if necessary. The dwelling might have to be vacated. All sorts of property must be accounted for, secured, divided appropriately and formally transferred as required. None of these chores can be avoided. A certain amount of time ‑ free or paid ‑ is inevitably involved. Obviously, leaving all these details to an attorney can be expensive, but it is usually not necessary if the Personal Representative and heirs can help.
The benefits, to most people, of the basic Living Trust have been greatly exaggerated, as have the problems experienced in Probate. Remember, the basic Living Trust will not save taxes ‑ fees, maybe, but not taxes. When people talk about using a Trust to avoid probate and its “costs,” they are referring primarily to attorney’s fees, which have traditionally been based on a percentage of the probate estate’s value. This very often results in unreasonably large fees for handling even simple estates. Such fees may be permitted, but they are never required by law.
Keep in mind, too, that if you use a lawyer to prepare a Living Trust ‑ which you certainly should ‑ the up‑front cost is greater than for preparing a simple Will. Also, most property should be transferred, so you will probably need at least one deed prepared, and financial accounts also must be re-titled to name the Trustee as legal owner. If you need the attorney’s time on these matters, it will probably cost extra. Finally, you should have a pour over Will done with the Living Trust anyway, so that any omitted or subsequently acquired assets are “poured over” into the Trust at death after the probate of those assets. This Will should be included in the cost of drafting any Living Trust.
DISPOSITION AND ONGOING MANAGEMENT OF PROPERTY
The possibility of leaving assets outright to minor children may be the greatest disadvantage of the simple Will. Many simple Wills call for everything to go to the surviving spouse ‑ which might be fine, IF there is a survivor. The potential problem is that most of these documents name the children as secondary beneficiaries, upon the death of the second parent, or in the event of a simultaneous death. If the parents die while the children are minors, a guardian must be appointed over the children’s inherited assets (and over the children themselves), and this is a cumbersome form of property ownership. E.g., the law might require division of an asset, such as real estate, among the children, rather than holding it intact. Remember, too, that guardianship usually ends at age 18 and assets must then be distributed outright.
A Trust, on the other hand, might provide for distributions only at a later age, once more maturity and financial responsibility have been developed. Until then, almost unlimited flexibility can be achieved in the management of estate assets with a Trust. This flexibility is desirable in dealing appropriately with the unique abilities and opportunities (or disabilities or illness) of each child, without requiring rigid equality of spending over the years. This is the approach most parents take while alive.
With a Will, in contrast to a Trust, the Personal Representative’s management ends with his final report to the court, soon after completion of his legal duties. Many simple Wills provide that when both parents are gone, everything is distributed outright, equally among the children. Never mind about their actual needs. With a Will, the way to be “fair” is usually to just be “equal”, because it is written in stone. Unfortunately, though, nobody can tell what the future might bring.
Probate Court supervision over sales, investments and accounting after death can be reduced or eliminated if, at the time of death, assets are already held in a Living Trust. This factor can save time and expense, too. Note that a Testamentary Trust does not help you in this regard; Probate Court is Square One, since a Testamentary Trust is created in a Will. Only after probate of the Will does a Testamentary Trust come into being, and it often must be registered under state law. Testamentary Trust transactions may be subject to court review.
PLANNING FOR DISABILITY OR INCOMPETENCE
A Will, of course, is of no help in this regard, because it has no effect at all until death. When disability planning is appropriate, the Trust can be a useful tool. Since assets in a Living Trust are already under the control of a Trustee, who can make financial decisions, the estate owner’s resources can be managed and used for his/her benefit even in the event of sudden incapacity. Therefore, it is imperative that a back‑up Trustee be named, especially if the Grantor initially serves as his/her own Trustee. When two spouses are serving as their own Trustees, the Trust document should be worded to allow either to act independently. In all cases, if the disability is temporary, the Grantor can resume the role of Trustee, if desired.
The Living Trust can thus avoid months in a legal disability proceeding to have a guardian appointed by the court. Ongoing court supervision over financial decisions is also avoided. A Testamentary Trust, by definition, does not exist during lifetime and cannot offer this benefit.
OWNERSHIP OF REAL ESTATE IN MULTIPLE STATES
Consider a Living Trust if you own an out‑of‑state residence, a vacation or rental real estate. This would allow for immediate distribution of the property after death, and avoid multiple probates of your Will, one in each state in which real estate is owned.
TIME AND PUBLICITY
Probate of a Will takes time ‑ in many States at least six months to one year. The Trustee of a Trust, however, can begin distributing property according to your wishes immediately after death. Probate records are open, but a Trust document is private.
Very often, neither of these factors is of practical concern to the survivors, but sometimes they are, and can cut both ways. There is a potential advantage to the delay and publicity of probate court: It purposely puts the world on legal notice that the time is now to come forward with claims against the deceased. Creditors generally must, by law, present their claims against the estate to the Personal Representative within a limited period (three months from the first publication of the Notice of Administration) or they will be barred forever. That rigid statutory cut‑off period does not apply to claims against your Trust. It almost certainly would not apply if legal notice had not been published, as happens during the probate of a Will. This could be important if you are involved in a profession or business that might leave potential claims against you “out there” when you die. On the other hand, a potential disadvantage of probate court’s public records is that the financial problems of a family business might be revealed to competitors and/or customers ‑ if they look.