Do I use a Trust or a Will to Settle My Estate When I Die?
My mother said, “I’ve got to admit, it is very confusing. Which one is better for me a Trust or a Will? “
There are some books and financial planners out there selling the snake oil of Trusts (also known as Living Trusts or Revocable Living Trusts or “RLT”) as the elixir to cure everything from estate taxes to attorney’s fees. Bad news, they don’t.
I laugh at the self-help books and web sites that promote setting up your own Will or Trust. Hey, if all you have are a small bank account and a car, go for it. Beyond that, it is a nightmare requiring a deep knowledge of the Law, finance, banking, insurance, tax, retirement plans, trusts and Estates.
You are always safer with proper legal advice, and the least expensive is not always the best. A sign I saw in another lawyer’s office said it well: “If you think hiring a professional is expensive, just wait until you hire an amateur!”
So What do I Recommend? I recommend Wills to my younger clients since dealing with the hassles of a trust for 40 years is problematic. Once my clients hit retirement, or have complicated problems with disability or are having problems handling their affairs, I recommend they rotate into a Trust.
Wills vs Trusts
In general, Wills are usually easy and cheaper up front, but more effort and expense later on, while Trusts are more work up front, more expense up front, and more administrative work along the way, but usually less work and expense when you die.
Wills are back-loaded, with the heirs assuming the burdens while living trusts are front-loaded, with the effort and expense up front, leaving fewer burdens on a surviving spouse, children or other heirs later. Oh and by the way, just because you have a Trust, doesn’t mean you don’t have a Will and you may have a probate proceeding too. If you leave an asset outside the Trust, you’ll need a probate proceeding to transfer it.
How Does this All Work?
With a Trust, you put all your assets into a Trust before you die. Then when you die, it has all the assets, pays all the debts, and the Trustee handles everything.
With a Will, the Will is presented to the local probate court and the court appoints your designated Executor. Then the Executor, collects all the assets, pays all the debts and handles everything.
End Result is the Same
The end result whether through Probate with a Will or through a Trust is almost always the same. Bills and taxes are paid, and the assets are distributed to those who are supposed to receive them. Both accomplish the same thing, wrapping up your affairs when you die. They are just two different paths.
The real question is at what cost and administrative burden and is one better than the other?
Don’t Go the Expensive Route
What I can tell you is that if you don’t have a Will or a Trust, you have gone the expensive route and left it up to the State to decide who gets your assets and who is in charge of your estate.
So my advice is to make sure you have one of them.
Which to Use Will or Trust?
People argue passionately about which way to go. Most are non-lawyers who don’t really know the facts and perpetuate the myths. I have to laugh at some of the stuff I hear.
The truth is that in some circumstances, the Trust is absolutely the way to go. If someone may not be capable of handling their own affairs, the Trust is much cheaper and simpler than a guardianship proceeding. The Trust is more reliable and better than a Power of Attorney if you are disabled or unable to handle your affairs. If someone wants to have someone else handle the financial and investment stuff, the Trust is a good method. If there are houses or other property in multiple states, the Trust is much cheaper and simpler than multiple probate proceedings. If you anticipate a Will contest, the Trust is harder to contest.
The question is whether the immediate costs and ongoing administrative burdens involved in setting up a Living Trust, transferring assets to it, and then administering the Trust for a long time, will outweigh any potential savings that may be realized by avoiding probate in the future.
Furthermore, I don’t want to get too deeply into family dynamics; however, there may be times when you want the “extra scrutiny” of the Court.
Generally, in any state, the higher the cost of probate and the longer the length of time involved in probating a Last Will and Testament, the more attractive a Trust is.
What are the Advantages of the Living Trust?
• The trust works well and avoids Court probate proceedings provided you don’t leave any assets outside it. This saves probate fees (in some states), court costs, executor’s commissions and attorney fees. In Connecticut, the Trust does not save probate fees.
• It avoids multiple Probate proceedings in different states where real estate or other assets are located.
• The Trust is often a more orderly process. The asset and liability information at death is known by the Trustee.
• Money and assets are generally distributed faster.
• The trust is more private, although not totally. Most financial institutions may require copies of the trust agreement before complying with its terms, and the Trust may otherwise be disclosed in some States.
• Trusts are very flexible. So long as the grantor’s intentions can be expressed in words, they can be embodied in a trust.
• So long as all interested parties agree, it is easier to “change” the terms of a Trust than a Will, even after the grantor dies or becomes incompetent.
• With Trusts, it is less important if the original documents are lost. Copies of a Trust document can substitute for a lost original. If an original Will is lost or misplaced, it is a big issue.
• A Trust is more difficult to contest than a will or codicil.
• A trustee of a Trust has more independence and control than an executor of a will because, unlike an executor, the trustee is not required to file a Will or other reports with a court.
What are the Disadvantages of the Living Trust?
• Up-front costs to create and fund the Trust are more than for a Will.
• The Lifetime Costs costs of maintaining and administrating a Revocable Trust during an individual’s lifetime are more than a Will.
• Assets must be properly transferred to the Trust. Time and money must be spent by the grantor after the Trust is set up to see that all of the transfers are made. If they are not, the Trust may provide little or no savings, and Probate may still be necessary.
• Claims of creditors of an estate are cut off 150 days (CT) after appointment of the Executor. It is longer for a Trust.
• Some assets may not be held in a Trust without adverse income tax effects (retirement accounts).
• In some states, homeowners may not be entitled to protections afforded by a homestead exemption if they place their homes in revocable living trusts. • Real estate transfer taxes may be triggered upon transfer of real property to a Trust.
• Real estate tax breaks available for owner-occupied residences or the elderly or disabled may not be available when real estate is placed in a Trust.
• Property subject to loans (mortgage) may trigger the debt upon transfer to the Trust.
• Absence of court Oversight. The administration of a Revocable Trust will not be supervised by any court, increasing the possibility of administration malfeasance and limiting oversight. Neither Advantages Nor Disadvantages, But Important
• A Will is still necessary even though you have a Trust. It is there in case there are any assets which didn’t get into the Trust.
• There is no Estate Tax savings. Therefore, the Trust has no advantages over Will for estate tax planning purposes.
• The Trust or Estate generally should not own or be the beneficiary of retirement plans such as IRAs and 401k plans. Normally naming real people results in better income tax treatment.
• There are no gift tax consequences from making transfers of assets to the Trust or revoking it.
• The assets transferred to the Revocable Living Trust are not protected for purposes of Medicaid eligibility and long term care planning. Because, the Trust is revocable, the assets are considered an available resource for Medicaid eligibility purposes
• Generally, Trusts cannot be used to avoid creditors. During the lifetime of the grantor, assets in a Revocable Trust are treated as owned by the grantor and therefore, are subject to the grantor’s creditors. However, the Trust can even be set up so that it will become an asset protection trust for non-grantors which would ensure that your kids’ inheritance is insulated against creditors and loss from divorce or excessive spending.
• The Living Trust is distinguishable from a Testamentary Trust which is made a part of a Last Will and Testament, and only becomes effective upon the death of the drafter of the Will.
There are specific rules and circumstances that apply to Connecticut and New York.
Some Common FAQ’s
I’m Not Wealthy, So I Don’t Need A Revocable Living Trust?
Well, that is generally not true. It is true that the more you are worth, the more compelling the Trust becomes. However, in Connecticut, estates worth about $500,000 will usually pay more in probate court costs than our firm charges to add a Revocable Living Trust to your estate planning package. Most Yankees with a $500,000 estate would not consider themselves wealthy.
Once You Transfer Property Into A Revocable Living Trust, It’s Not Yours Anymore
No, from a practical standpoint, the property is still yours just as much as if you had never created the trust. That’s why it is called a “Revocable Living Trust”. You retain the power to take the assets back and revoke it. Just remember, this is distinguishable from an Irrevocable Trust which cannot be amended or revoked by you.
Doesn’t a Power of Attorney Give me the same Control as a Trust?
Generally, not. Because a power of attorney can be revoked at any time, some banks and brokers impose irritating demands and proofs of continued validity at each use. A few institutions simply refuse to honor powers of attorneys. If you are relying on a power of attorney for management in the event of incapacity, you should discuss with each institution in advance its basic policy for accepting the authority of an agent under a POA. You should also be aware they can change those requirements at any time without notice. Some require special language to be included in the POA before you are disabled. Bottom line, a POA is a good short term fix. For long term situations, a Trust is a much better solution.
Does it Avoid a Conservatorship?
Yes, a Trust generally will avoid a Conservatorship (in CT some are Conservatorship and some are Guardianship) proceeding. Proceedings for living persons who are incapacitated to get someone to handle their affairs are called “Conservatorship proceedings”. These should be avoided as costly, expensive and slow. A Trust is a much better solution. A durable power of attorney is effective to avoid Conservatorship during relatively short periods of incapacity and is much less expensive to put in place than a revocable living trust. It is generally not a good long term solution.
Elder Law Attorney and Estate Planning Attorney, John Sweeney, a member of Sweeney Legal, LLC, provides legal counsel to businesses and families in the Fairfield, Connecticut area, including the communities of Bridgeport, Bethel, Brookfield, Danbury, Darien, Easton, Fairfield, Greenwich, New Canaan, Newtown, Norwalk, Redding, Ridgefield, Stamford, Weston, Westport and Wilton. He is also licensed in New York serving Westchester County including the towns of Bedford, Lewisboro, Mount Kisco, North Salem, Pound Ridge, and Somers.