Types of Wills  /  Life Estates  /  Forms of Owning Real Property

 

                      Probate Avoidance?

When to Use a Will & When to Use a Trust

A considerable amount of literature has been written about the advantages and disadvantages of revocable living trusts over wills. The purpose of this article is to provide some general guidelines as to when a trust may (or may not) be a preferred estate planning document over a will. This memo is meant to complement and not replace competent legal advice.

There are many kinds of trusts. The trust referred to in this article is a fully-funded revocable living trust under which you would serve as the Trustee and to which you would transfer your assets. You do NOT have to have a bank as a Trustee. Having a bank serve as trustee may be attractive to some people, but most people do not want banks involved in their family's financial affairs anymore than they want the probate courts and the attorneys.

There are two basic steps in establishing a revocable living trust. First, you meet with the attorney or trust provider service who will draft your trust and other related documents. After signing your trust, you would transfer all, or most, of your assets to your trust or name your trust as a beneficiary on insurance policies and the like. Because you are the trustee, you haven't lost any control and no new tax returns are required. You continue to report the income from your trust property on your Form 1040 just like you always have done. Your home is still eligible for the $250,000 every two years exclusion ($500,000 for married couples) on capital gains as well as other tax breaks available to homeowners.

It may be helpful to think of a revocable living trust as your own private little company in which you (or you and your spouse) are the president, chairman of the board, sole shareholder, and sole employee. You are the only one involved. Your company (the trust) owns your assets. So when you die or become incapacitated, you don't own any assets, your trust owns them. Your trust has specific instructions of how to manage and distribute your assets in the event of your disability or death. Thus, assets owned by your trust avoid the need for a conservatorship (if you are disabled) and for probate (upon your death).

Probate is the process of winding up the affairs of one who has died and transferring the decedent's property to the proper persons. Probate may involve having to prove a will, notifying creditors and all potential heirs, and resolving conflicts (sometimes called will contests). Probate is generally required only when you die "owning property in your own name" without a surviving joint tenant or named beneficiary, i.e.; a living trust.

Just how onerous is probate? It varies by state. It costs $46,000-plus to probate a $1 million estate in California (your attorney and your executor each get $23,000), and as little as $5,000 in Washington State. If you have a simple estate, shop around for a lawyer who will agree to be paid for time worked, instead of the more common percentage-of-the-estate fee. Some states mandate tedious inventory and accounting rules for probate, while others allow the beneficiaries to simply sign off on the executor's proposed distribution.

Interestingly, many people believe that if they have a will, they will avoid probate. That simply isn't true! Having a will is an engraved invitation into the probate maze. For a will to have any legal effect, it must be submitted for probate. Even pour over wills associated with living trusts are required to be lodged in the county probate court sixty days after death and an affidavit of death of a trustee filed at the county recorder's office as soon as possible.

Many observers in California feel that average probate costs may run 7% ~ 14% of the estate; but even 2% of a $200,000 (your home and other property) amounts to $4,000. You can avoid these costs with a properly drafted and funded revocable living trust simply because upon your death you do not own your property; your trust does.

Probate is time consuming and frustrating. Probate in California usually takes between six months and two years or more, depending on the complexity. If you want your family to have immediate access to your property upon your death, you don't want probate.

Probate may also be required to be opened in every state where there is real estate. It is not unusual that small parcels of real estate are abandoned by heirs because the cost of probate exceeds the value of the parcel. Property owned by your trust will generally avoid probate in all 50 states.

If you become mentally incapacitated (disabled), your property is essentially frozen until the probate court appoints a conservator to manage your financial affairs. For instance, upon your disability your home and your investments generally cannot be sold, even if owned in joint tenancy, until a conservator is appointed. This usually involves filing fees, attorneys fees, accounting fees, and court orders, all designed to "protect" the disabled person. While this protection may be desired in some cases, many people feel that these are family matters and they simply don't want or need the "protection" of the courts and the attorneys. Property owned by your trust avoids the need for a conservatorship; your designated successor trustee can manage your financial affairs in the event that you are unable to do so.

It should be noted that the revocable living trust offers no creditor protection for its Trust maker, but can provide excellent creditor protection for the Trust maker's beneficiaries. A will can also create a trust (called a "testamentary trust") to provide the same type of protection, such as for minor children. Property passing pursuant to either a will or a trust is eligible for step-up in basis, which reduces taxable gains to an heir who sells your property after your death.

Federal estate taxes can be reduced for married couples with proper drafting in either a will or a revocable living trust. Keep in mind, however, that to obtain the tax savings features of a will you will necessarily incur probate on both deaths. The revocable living trust can avoid probate on both deaths. All too often those who attempt to minimize estate taxes with a will continue to hold their property in joint tenancy, thus avoiding not only probate, but also the tax savings trusts created by the will. Because of such devastating errors in titling property, many attorneys feel that a funded revocable living trust is more likely to achieve the desired tax savings.

Probate is a matter of public record. It is a legal proceeding initiated and paid for by your family. An inventory of your assets, the names and addresses of your heirs, and any family disputes may all become a matter of public record. There are even salesmen who use probate records as a source of leads. For various reasons, many people do not want their family affairs a matter of public record.

Wills are easy to contest; a simple letter to the judge can tie up assets for months or longer. Disgruntled heirs can use the threat of a will contest to attempt to receive more than they were left in the will. A trust is generally a private document. No notice is required to be sent to disinherited heirs; no inventory, not even a copy of your trust, is required to be filed. Trust are generally viewed as being far more difficult to challenge.

It is interesting that many attorneys who regularly recommend holding property in joint tenancy (primarily to avoid probate on the first death) feel that their clients don't "need" a trust.

Question: If probate is worth avoiding at the first spouse's death; why isn't it worth avoiding on at the second spouse's death?  Some observers have felt that such attorneys are primarily interested in getting the probate fees after the second spouse's death when the beneficiaries are most vulnerable.

More likely, attorney resentment toward trusts lies not so much in greed, but in ignorance. Many attorneys are simply ignorant about the advantages of revocable living trusts (the area is barely discussed in law school) and have never drafted one.

You are probably thinking that this memo so far sounds like a sales job for the trust. It is not intended as such, but it is important for you to understand at least some of the advantages of trust planning over will planning before you can effectively evaluate the added cost of the trust in light of the added benefits the trust may provide. Unfortunately, there are few simple answers in this complex world, but for many, deciding in favor of the trust is an easy decision.

The disadvantages of a trust involve largely business decisions. A trust generally costs more than a will ($300 for a will verses $600 ~ $1500 for the trust). The cost and quality of any legal document will vary from attorney to attorney and complexity of the estate. In this age of specialization, an attorney who limits his or her practice to estate planning may provide a more comprehensive estate plan at a lower cost than a generalist. You may wish to talk with several attorneys before making a decision. Many attorneys will offer you a free consultation to discuss your estate plan.

Ask to see a sample trust. Ask what other documents are included. Ask what assistance is provided in transferring your assets to your trust. Ask if your prospective provider has a trust himself. Ask how many trusts they draft each year. You will want an experienced trust provider who believes in trust planning.

Can you draft your own documents? Yes, but estate planning is not like a do-it-yourself home plumbing job. If you botch the plumbing job, you can call a plumber to fix it. If you botch your estate plan, it probably won't be discovered until your death when it is too late to fix. Your family and your money are too important not to seek professional assistance.

Many of the reported disadvantages of a trust are of questionable validity. No annual fees are required if you serve as your own trustee; similarly no control is lost. It may be time consuming for you to transfer your property to your trust, but it is still simpler for you to do this than for your heirs to transfer your property after you are gone.

Yes, you still need a will (for any property which was not transferred to your trust), but most attorneys include that document when they draft a trust-based estate plan at no extra cost. A trust is more complex to understand, but that is no reason for not doing one. How many families understand the complexity of probate, which is what you leave them by using a will?

There are additional relatively insignificant differences (i.e. advantages and disadvantages) between trusts and wills which are not discussed herein. For a more thorough discussion of those issues, see The Living Trust Revolution by Robert Esperti and Renno Peterson.

Now that you know the major advantages and disadvantages of trusts over wills, let's equate these to specific situations.

For young person or couples who (1) are in good health, (2) have small estates, (3) own no out-of- state property, (4) are likely to have family changes (i.e. marriage, divorce, children, etc.), and (5) are less concerned about avoiding probate and conservatorships, a will is almost always more cost effective. That doesn't mean that they could not benefit from a trust; it merely means that the present or expected value of trust planning does not justify the additional cost.

As this couple moves into middle age, with more assets, more health problems and the like, the full cost of the trust may still not be justified if their existing wills are still consistent with the dispositive goals. If their wills are obsolete or non-existent, then the money to be spent on just a will might best be applied toward the cost of a trust-based estate plan. Sooner or later they will probably want a trust anyway.

As the couple grows older and becomes more concerned about disability, probate avoidance, estate tax minimization, and making things easier for their families, then the trust becomes far more desirable than the will.

Any one of the following factors could cause you to prefer a trust over a will:

USE A WILL

FACTORS TO CONSIDER

USE A TRUST

Young/Under 40

Age

Older/Over 55

Good Health

Concern about Incapacity/Probate

Poor Health

Simple

Family Situation

Complex

Low

Desire for Privacy

High

Small

Size of Estate

Taxable or nearly so

None

Out-of-State Real Estate

Any

Up-to-Date Will

Current Status

Simple Will or None

None Needed

Desire to Protect Family

Strong Desire

Little or None

Likelihood of Contest

Some Chance

CONCLUSION: Many factors should be considered when deciding whether you should use a trust or a will as your basic estate plan. The anticipated value and timing of those benefits must be weighed against the additional cost. Regardless of whether you choose a will or a trust, you now have a framework for which to make your decision and, perhaps, better understand why the living trust is replacing the will as America's estate plan of choice.

NOTE: THIS SAMPLE FORM IS NOT A SUBSTITUTE FOR THE ADVICE OF AN ATTORNEY. LEGAL ADVICE OF ANY NATURE SHOULD BE SOUGHT FROM COMPETENT, INDEPENDENT, LEGAL COUNSEL IN THE RELEVANT JURISDICTION. ABSOLUTELY NO WARRANTIES ARE MADE REGARDING THE SUITABILITY OF THIS FORM FOR ANY PARTICULAR PURPOSE.

 

Last Will and Testament of Mr/s Doe

(WHO DIED WITHOUT A WILL)

I, Mr/s Doe, of Anytown, California, hereby do make, publish and declare this to be my Last Will and Testament.

FIRST ARTICLE

I give to my spouse, if he or she survives me, all of our community property and one-third of my separate property and give my two minor children the remaining two-thirds of my separate property.

A. I appoint my spouse as guardian of my children; but as a safeguard I require that s/he report to the County Probate Court each year and render an accounting of how, why and where s/he spent the money necessary for the proper care of our children. The children’s estates shall pay all accountant and attorney fees to comply with this requirement.

B. As a further safeguard; I direct that my spouse pay for a surety bond to guarantee that s/he exercises proper judgment in the handling, investing and spending of our children’s money.

C. Just in case, as a final safeguard; our children shall have the right to demand, and receive, a complete accounting from their surviving parent of all his/er financial actions as soon as they reach legal age.

D. When our children reach eighteen, they shall have full rights to withdraw and spend their share of my estate. No one shall have any legal right to question their actions on how they decide to spend, or waste, their respective shares.

SECOND ARTICLE

If my spouse shall remarry, his/er second spouse may receive everything my spouse possesses, if s/he should predecease him/er without executing a Last Will and Testament.

A. Should my still minor children need monies for their support; the second spouse is under no legal bounds to support them nor is s/he obligated to leave anything them anything in his/er Last Will and Testament.

B. The second spouse may totally disinherit our children even after they are of legal age and everything my spouse brought into the second marriage from our marriage may go to his/er children alone to the exclusion of our children.

THIRD ARTICLE

Should my spouse predecease me or die while any of our children are minors; I do not wish to exercise my rights as a parent to nominate the guardians of my minor children.

A. Rather, I direct that any and all of my relatives assemble together and fight over custody of my children in the County Probate Court.

B. In the event a consensus cannot be determined over who will be the guardians of my minor children; I direct that the County Probate Court make that decision even to the exclusion of any blood relative and the appointment of a complete stranger acceptable to it.

FOURTH ARTICLE

Under existing California tax law, there are certain legitimate avenues open to me to lower death taxes; however, since the State of California is currently drowning $35 Billion in red ink, I prefer to have my money used for probate fees, court costs, attorney’s fees, filing fees, accounting costs, appraisal fees, arbitration costs, and other governmental purposes rather than avoiding these fees and passing more money to my heirs; I direct that no effort be made to lower taxes, avoid fees, and preserve more money for my family after my death.

FIFTH ARTICLE

I fully realize that this Last Will and Testament was written for me by the State of California and does not reflect my wishes or desires. I am truly sorry to my spouse and children that I did not have a Last Will and Testament, living trust, audio recording, handwritten note, or video tape of my final requests. I know that my indecision and lack of action has made my death a greater tragedy than it already is – but, @#&* happens.

"Deceased – No signature required"

 

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C. Francis Baldwin
chasbaldwin@surewest.net
Updated Wednesday, May 26, 2004