Trust Versus Will – Which is Right for You?
What is a Living Trust? Individuals can create trusts in two ways – while theyare living or by their wills (after death). Trusts created during life are called “inter vivos” trusts and trusts created after death are called testamentarytrusts. Trusts can be either revocable or irrevocable. Only a living trust may berevoked by the trust creator. Individuals seeking to “avoid probate” most commonly create revocable living trusts.
Who are the Parties to a Trust? Each trust has at least 3 parties involved. The first party is the grantor, who may also be referred to as the settlor, the creator or the trustor. The grantor determines the terms of the trust and provides the property to be placed inthe trust. The second party is the beneficiary, the individual or organization intended to receive trust property. The trust’s income beneficiary receives the income earned by thetrust. Typically, the principal or remainder benefi ciary receives the property remaining in the trust afterthe income beneficiary’s death or upon some other event specified in the trust document. In a revocableliving trust, the grantor is often both the income and the principal benefi ciary during his or her lifetime. The third party to each trust is the trustee. The trustee is responsible for managing the trust property inaccordance with the trust provisions. Trust property is titled in the name of the trustee. In a revocableliving trust, the grantor is often the initial trustee.
Why Do So Many People Want to Avoid Probate? The main reason for an individual to transfer his other property to a trust where the individual is both the beneficiary and the trustee is to “avoid probate.” But what is probate and why should anyone be afraid of it? Probate is the legal process for carrying outyour desires regarding the disposition of your estate after death. If there is a will, your nominated personalrepresentative will be supervised by the probate court in carrying out the terms of your will. If you diewithout a will, the probate court must supervise administration and distribution of your estate to yourheirs in accordance with state law. The following are some reasons you may wish to avoid probate:
• Cost. Every probate estate has certain costs associated with the administration. These costs couldinclude, but may not be limited to, court fi ling fees, personal representative fees, accounting fees, legalfees, and appraisal fees.
• Delays. There are legal requirements for probate administrations which must be satisfi ed before theestate will be able to be “closed” for probate purposes, including publication of notice to creditors, inventory, tax and accounting requirements. In estates where there are missing or unknown heirs, or ifa will is contested, the probate process may be delayed.
• Publicity. All probate fi lings are a matter of public record, including the decedent’s will, inventoryand estate accounting. Your personal representative must also publish notice of the estate proceedingsin order to limit the creditors’ claims period.
• Family Disputes. The probate process requires that notice of the proceedings be given to allinterested parties, which may include feuding family members looking to dispute the decedent’s will.
Are There Advantages to Creating and Funding a Revocable Living Trust? The creation and funding ofa revocable living trust is not the perfect estate planning answer for everyone; however, there are reasonswhy such a trust may be worth the additional time, effort and cost that will be required during yourlifetime:
• Avoiding the Publicity of Probate. Unlike wills that are being probated, living trusts are not amatter of public record for anyone to access. Nor are the accountings or the distributions to and fromyour living trust.
• Planning for Incapacity as Well as Death. Your funded living trust should provide for a successortrustee who will be authorized to take over the administration of your assets immediately upon yourincapacity.
• Avoiding Multi-State Probate Issues. If you currently own real estate in several states, you mayavoid the need for a probate administration in each state upon your death with a properly funded livingtrust.
• Reduced Costs After Death. While there are up-front costs associated with creating and funding arevocable living trust, they may be more than offset by the fees and costs associated with a full probateadministration after your death.
Common Myths about Probate and Living Trusts. Individuals and organizations often publicize the “perils of probate” or overstate the benefi ts of creating and funding a revocable living trust in an attemptto sell you the latest do-it-yourself estate planning book or software program. Some common myths aboutprobate and revocable living trusts include:
• Your Assets Will Be Distributed to Your Loved Ones Without Delay Only if You Have a Trust. With a well drafted will, a knowledgeable personal representative will be able to make certaindistributions to your named benefi ciaries during the probate administration. In addition, any jointlyheld assets or accounts with benefi ciary designations (including life insurance) may be distributed assoon as death certifi cates are issued.
• Avoiding Probate by Creating and Funding a Living Trust Will Save a Lot of Money. Thecosts incurred during your lifetime to create and fund your living trust combined with the costs ofterminating the trust after your death may not be much less that the costs associated with draftinga simple will and then completing an informal probate administration in Wisconsin. Aside fromactual probate court fees and costs, most of the costs associated with a probate administration relateto professional services – accountants, appraisers, attorneys and your personal representative (if he orshe actually accepts payment for serving). In order to terminate your living trust after your death, afi nal accounting and income tax returns are required, and, especially if your estate is large enough torequire fi ling an estate tax return (not relevant in 2010, so far!), some of the same costs for professionalservices will be incurred as exist in a probate administration (exchanging the personal representative’sfee for a trustee’s fee).
• A Living Trust Will/Won’t Save Estate Taxes. Some say that a living trust will save estate taxes. Others will tell you it won’t. Which is correct? It depends. This question is further complicatedby the uncertainty surrounding the federal estate tax (see the article in this newsletter authored byAttorney John Nelson for more information on the federal estate tax).
• If You Have A Living Trust, You Don’t Need a Will. This is true only to the extent that your trustincludes all of the instructions necessary to carry out your wishes and you have properly transferredownership of all of your assets to your trust during your lifetime (excluding joint assets and assetspassing via benefi ciary designation). Also, your will is the only place you may legally designate aguardian for your children in the event you pass away while they are minors.
• A Revocable Living Trust Will Provide Protection from Your Creditors. Absolutely not if you areboth the grantor and the benefi ciary of your living trust. Until your death, as the grantor of a revocableliving trust, you have the ability to request that the trustee return to you of any or all of the trust’sassets. As a result, these assets remain available to satisfy creditor’s claims.
As you can see, the answer to the question “Do I need a trust or a will?” is not the same for everyone. If you have any questions about which document would be best for you, please do not hesitate to contact us.
Laura J. Petrie