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V. COMPARING SIMPLE LIVING TRUSTS and WILLS
A. Neither document resolves all your affairs
C. Disposition and ongoing management of property
D. Planning for disability or incompetence
E. Ownership of real estate in multiple state
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V. COMPARING SIMPLE LIVING TRUSTS and WILLS
A. Neither document resolves all your affairs
Be realistic; 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 Executor and heirs can help.
Whatever your choice, here are some things to consider in comparing the Will and the simple living Trust:
The benefits, to most people, of the simple living Trust have been greatly exaggerated, as have the problems experienced in probate. Remember, the simple 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 attorneys’ 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 changed 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. This Will should be included in the cost of drafting any living Trust.
TIP: If saving a probate attorney's
percent-based fee is the only reason you want a living Trust, you (or your
Executor) can find somebody willing to handle probate on an hourly fee basis.
Don't gripe about lawyers; just shop around. Understand that Wills, Trusts and
estate work comprise one of the very most complex and difficult areas in the
law, so these attorneys might charge more than others. But even with a high
hourly rate, the final, total fee will often be much less than a fixed
percentage - IF the estate really is a simple one to settle.
C. 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 kids 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. (This ongoing, discretionary power to “sprinkle” or “spray” money as needed can be useful, too, in providing income for a surviving spouse, while protecting the principal of the estate for your children from a previous marriage.)
BEWARE! But watch out if your Trustee might also a beneficiary!
E.g., Oldest daughter becomes Successor Trustee, after Dad becomes disabled. If
the Trust gives the Trustee broad discretion to “sprinkle” income, ALL
that income might be taxable to her, personally - even if she never actually
“sprinkles” herself a dollar!
TIP: The Trustee should be specifically
empowered to “assist” a child’s guardian, e.g., by adding a bedroom to the
guardian’s house, or buying a bigger car. These are things that, obviously,
benefit the guardian, in addition to the child. Therefore, without this
authority, the Trustee might be uncertain about whether such reasonable
expenditures were, in fact, permitted by the Trust document.
With a Will, in contrast to a Trust, the Executor’s management ends with his final report to the court, soon after completion of his legal duties. So, 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 this kind of 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.
D. 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.
E. Ownership of real estate in multiple
states
Consider a living Trust if you own out-of-state vacation or rental real estate. This would allow for immediate distribution of the property after death, and avoid probate of your Will in each state in which property is owned.
Probate of a Will takes time - at least six months. 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 Executor within a limited period (six months is common) or they may be barred forever. That rigid statutory cut-off period might 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.