Will vs. Living Trust: What's Best for You.

I felt the need to write something on this subject because on too many occasions I have been called to list an inherited piece of real estate property only to learn the surviving relatives have no idea they can't  even put the property on the market without going trough a probate process first, even if there is a will.  In fact, I have realized many people don't know what a trust is, and are completely unfamiliar with the word probate. 

Probate is actually a very common legal procedure and is the way that some assets must be formally passed from the person who is deceased to his or her heirs or beneficiaries, but some people dread it because it is expensive and it's a process that can drag for many months and can get very complicated, especially when there are too many siblings and not everyone agrees on what they want to do with the property inherited.  Obviously the last thing anyone wants is to give a large portion of their hard-earned money to the government in the form of probate fees. Nor do we want our loved ones, especially our spouses and children to wait months, even years to receive a penny.  That's why it is so important to understand what is the difference between a will and a trust and learn what is best for you while there is still time.   Even if you are a person of modest means, you have an estate—and several strategies to choose from to ensure your assets are distributed according to your wishes and in a timely fashion.  The right strategy depends on your individual circumstances. For some, a living trust can be a useful and a perfect solution, while for others, it may be a waste of time and money.

What is a living trust and how does it differ from a will?

What Is a Will?

A will is a written document—signed and witnessed—that indicates how your property will be distributed at the time of your death. It is revocable and subject to amendment at any time during your lifetime. It also allows you to appoint a guardian for your minor children. 

What Is a Living Trust?

A trust enables you to avoid the cost of probating a will. One of the main drawbacks of a will is the cost of probating it or passing it through the courts. In probate, there are court fees taken from the gross estate (the amount of the entire estate before the debts are paid out). This fee can often be as high as ten percent of the total estate which often is better used paying trustee fees and burial costs. With a living trust you avoid these court costs all together. One of the most popular ways to avoid probate is through the use of a revocable living trust. Assets are placed in the trust, but they can used by the trust creator during his or her lifetime. Upon death, assets in the trust are passed to the trust beneficiaries just by operation of the trust document. No probate is necessary.  A living trust provides lifetime and after-death property management. If you are serving as your own trustee, the trust instrument will provide for a successor upon your death or incapacity. Court intervention is not required (and this is where the big difference is).  Livings trusts also are used to manage property. If a person is disabled by accident or illness, the successor trustee can manage the trust property. As a result, the expense, publicity, and inconvenience of court-supervised distribution of your estate can be avoided. 

This is desirable for some people because doing so not only reduces legal fees, but it can mean avoiding the estate tax, which can take a significant amount of a very wealthy estate. Avoiding probate can also protect privacy, since some of the records may not be available to the public. 

While a trust sounds appealing, there are drawbacks. A living trust is more expensive to set up than a typical Will because it must be actively managed after it is created. Most importantly, however, a living trust is useless unless it is funded, as a living trust only can control those assets that have been placed into it.   Funding your trust is the process of transferring ownership of your assets from you to your trust. To do this, you physically change the titles from your individual name (or joint names) to the name of your trust. You will also change most beneficiary designations to your trust so those proceeds will flow into your trust when you die. If your assets have not been transferred or if you die without funding the trust, the trust will be of no benefit as your estate will still be subject to probate and there may be significant state estate tax issues.  

Name beneficiaries on your retirement and bank accounts

For some, a Last Will is often a better fit than a trust because it is a more straightforward estate planning document. Yet, just because you have written a will doesn't mean that all of your assets have to pass through probate. What most people don't realize is that many of our most valued assets allow us to name beneficiaries. In fact, you may not have realized that the bank account you opened when you got your first job probably enables you to designate a beneficiary that is payable on death.

Thought it may seem simple enough, many people don't take the time to actually name a beneficiary or beneficiaries for their bank accounts, investments and retirement plans. Payable on death accounts include life insurance policies, pension plans, 401K plans, IRA accounts, stocks and bonds.

Real estate that is owned as joint tenants, or joint tenants by the entirety passes outside of probate as well. This type of property has two owners. When the first owner passes away, the second one automatically owns the property. 

So what is best for you? In many respects, a living trust and a will accomplish similar objectives. A trust, however, allows you to realize other objectives that a will cannot. But those advantages don't come without a price. Whether or not a living trust is better for you than a will depends on whether the additional advantages are worth the cost. When choosing, remember that one size does not fit all. What is right for one person may not be right for everyone. Your estate plan should be prepared in a way that best meets the needs of you and your family.

I hope this article was helpful, but please bear in mind it does not address all the intricacies associated with last wills and living trusts. Consulting with a competent attorney can help you make the right decision.

Sources: Candice Lapin, Michelle Kaminsky