Wondering whether a will or a living trust is the appropriate document for your estate plan? The answer is simple—you should probably have both. These two estate-planning tools serve broadly similar roles—they direct how your assets will be distributed after your death—but they’re more effective together than either is on its own. Elder-law attorney Michael Gilfix looks at both of these important documents and explains why having only one isn’t ideal for most estates…
Most people already have some sense of how a will works. This document takes effect when you die, distributing your property according to your instructions, but first your estate must pass through the probate process, a form of legal proceeding. If you have minor children, your will also might appoint a guardian for those kids, though technically your will only nominates a potential guardian—the final decision is up to the courts.
A living trust is somewhat different. Rather than take effect upon your death, it takes effect immediately. But that doesn’t mean your assets are immediately transferred to your beneficiaries—they’re initially transferred to the living trust and pass to your beneficiaries only upon your death. Living trusts are “revocable” trusts, which means that you do not lose control over the assets you place in the trust or any flexibility over their management. You and/or your spouse will serve as the trustee(s) of your living trust and can continue to use or sell these assets as you see fit, and you have the right to make changes regarding who eventually will inherit those assets. Once your trust is created, you retitle non-retirement assets in the trust. Example: A bank account would be titled “Joe and Mary Smith, Trustees of the Smith Trust.” This is the process of “funding” the trust.
A living trust offers several advantages over a will…
The person you name as your “successor trustee” can legally manage your assets if you become unable to do so yourself. A will won’t provide this protection. Helpful: Another estate-planning document known as a financial power of attorney also can be used to appoint someone to manage your assets in the event you become incapacitated. The process tends to be smoother with a living trust but only with regard to assets titled in your trust. The power of attorney allows management of non-trust assets such as retirement accounts.
The person you name as successor trustee will be in charge of this process. With a will, the executor (named in the will) manages the court probate process—again avoiding probate is typically preferred.
Probate costs can be significant. Example: In California, a typical $1 million estate might face about $23,000 in legal fees alone, and larger estates often end up paying significantly more. Assets placed in a living trust don’t incur those costs because they don’t pass through probate. Fees for trust administration typically are much lower than probate fees.
The probate process is public—anyone can access these records. That’s why so many details about the financial lives of celebrities like Marlon Brando and Michael Jackson are well-known…and it means people will be able to discover details about your financial affairs if you use a will to leave your estate to your heirs. If you instead use a living trust, your assets won’t pass through probate and information about how much your financial accounts are worth and how you divided up your assets among your heirs can remain private.
Anyone can contest a will—all he/she has to do is speak up in court and file an objection. An heir unhappy about his/her share or even a non-heir who thinks he deserves a cut could derail the probate process, creating major hassles for everyone involved and major legal expenses for the estate. It’s much more difficult to challenge a living trust—someone would have to pay court filing fees, hire a lawyer and more. As a result, living trusts tend not to be challenged.
Some legitimate tax-planning options are far simpler to implement with trusts than with wills. Example: If you own less than 100% of an asset, your estate might be able to assign a discounted value to that asset due to the loss of control stemming from its divided ownership, a strategy known as discounting. Your 90% ownership of a $1 million property might be valued at $600,000 for estate-tax purposes rather than $900,000, potentially reducing or avoiding an estate-tax bill. This strategy can be pursued whether or not an estate is placed in a living trust, but as a practical matter, it’s much easier if there is a trust because of the complexities involved with pursuing it during the probate process.
Given all of those advantages that living trusts have over wills, you may wonder if you need a will at all. The main reason to have a will is that your living trust deals only with the assets that you have placed into that trust—and it is highly unlikely that you will include everything you own in a living trust. Examples: Perhaps you have a checking account in your name only…or you acquire an item shortly before you die and don’t get around to placing it in your trust in time. A will lets you determine what happens with these non-trust possessions. If you don’t have one, the courts will make the decisions for you, which could lead to inappropriate decisions or inflated probate costs.
Good news: Your will can be extremely simple if you have a living trust—all you need is a “pour-over will,” which simply directs that anything that’s in your estate at the time of your death and not titled in your trust should go into your trust. Even better: If you’ve already transferred all of your major assets to your living trust, the value of the assets that remain is likely to be low enough to qualify as a “small estate,” resulting in a “summary probate” process that’s dramatically simpler and less costly than the standard probate faced by other estates. Helpful: How small your estate must be to legally qualify as a “small estate” varies by state—in some states, the bar is set at $20,000 or less…in others, $200,000 or more…and certain states have more complex qualifying rules or don’t have small estate provisions at all. An estate-planning attorney in your state can provide details.
One more reason why a will might be needed: If you have minor children, your will can nominate someone to serve as their guardian after your death. A living trust is less appropriate for this purpose.
Two specific situations when a will might be sufficient on its own, without a living trust…
Living trusts are a wonderful estate-planning tool—if they’re used properly. Three unfortunate errors that can undermine their upside…
Error #1: Putting your retirement accounts into your living trust. Doing so likely would create tax exposure and headaches. Instead, leave your retirement accounts to your heirs by naming those heirs on these accounts’ beneficiary designation forms—these forms are another way to bypass probate.
Error #2: Choosing a successor trustee whom you don’t truly trust. Many people automatically choose their oldest child or the child who has had the most financial success to serve as successor trustee. Instead, select the person whom you consider your most responsible relative or friend.
Error #3: Failing to fund your living trust. Plenty of people pay an estate-planning attorney to set up a living trust, then never follow through and transfer their assets to that trust, rendering it worthless. The financial institutions that you work with likely have simple forms to fill out and sign to rename your accounts into your trust’s name. With real property, a new deed is typically prepared to title it in the trust.
