ESTATE
PLANNING: Wills v. Trusts
The Simple Will v.
The Revocable Trust
Which One is Right for You?
By John
B. Palley, Attorney at Law
INTRODUCTION
As an estate planning attorney I have heard the debate
of wills vs. trusts many times over. I have explained
the difference to hundreds of clients, and I have read
dozens of articles written about the topic. The topic
of which I speak is fundamental in my line of work. The
question I can help you answer is which basic estate
planning device is right for you: a will or a trust?
Generally the articles sway people toward the living
trust as the ultimate tool; and for many people this
is the right choice. However, it is not always the perfect
choice. The purpose of this article is to synthesize
all of the information out there, in a concise manner,
to help you make the proper decision for YOUR estate
plan.
Before we look at the will and the trust, let's quickly
discuss the need for estate planning in general. Without
a written plan in
place you and your heirs will likely encounter many problems
and inconveniences upon your incapacity or death. They
range the gamut from court room battles among family
members over custody of minor children to relationship
ending feuds between family members over the distribution
of assets. Additionally, there are many problems that
arise if a person becomes incapacitated. For example
if you were ever to end up in the hospital in a coma,
you need someone to be in a position to make decisions
for you. In these situations, it is important to have
written instructions to handle your personal and medical
affairs. The key is planning ahead. By establishing a
written plan, your wishes and needs will be carried out
exactly as you desire; without the written plan in place,
anything is possible!
Article
Contents
Simple Will
Probate
Living Trust
Estate & Gift
Taxes
SIMPLE WILL
The simple will (or "last will and testament"-
it's official name) is something that has been utilized
for hundreds, if not thousands of years. It is a legal
document which declares your desires for you, your assets,
and your family upon your death. The two main reasons
people write a will are because they do not want the
state to decide who gets their assets after death (as
would be the case without a properly drafted will in
place) and also because they want to select who should
be the guardian of their minor children if the parents
are to die prematurely.
Although a will is not the most effective means of estate
planning, due to the delay and expense of probate, it
does do a lot. A will makes sure your property is given
to the people you desire to benefit, how you want it
distributed to them and it does so when you want it to
go to them. This distribution can include real estate,
cash, bonds, stocks and other valuable assets; as well
as other items with less monetary value such as family
photos, collections of knick-knacks, and other items
around your house. The person appointed to handle this
distribution is called the "executor" or "personal
representative." The executor is generally a family
member or very close friend, who is highly trusted to
take care of your affairs. The other big job of a will
is to establish a successor guardian for minor children,
to avoid court battles after your death. Many people
also use a will to establish a testamentary trust to
protect money given to minor children, make requests
for burial arrangements, and even set up provisions to
provide for family pets.
The will is the main piece of a basic estate plan, and
does not require substantial legal fees for its development.
The other documents that complete a basic estate plan
include a Durable Power of Attorney for Financial Affairs,
a Durable Power of Attorney for Health Care, and a Living
Will (or Health Care Declaration). With all this, a person
has put together a well thought out plan which will provide
for them during incapacity as well as after death.
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PROBATE
Having a will still requires a person's estate to go
through a very archaic process, called "probate." This
is the court administered process of dividing up one's
assets in an "orderly" fashion. The only problem
is this "orderly" process costs your estate
time, money, and makes your estate a public record.
In rough terms, you can lose as much as 6% of your gross
assets to probate fees and costs. In California people
with under $100,000 in gross assets can avoid probate;
as can people who hold their assets in certain title
arrangements. In general the time delay, the cost, and
the public nature of the probate process make the antiquated
procedure unnecessary and in fact painful in many situations;
it is something to avoid if possible!
Probate can be particularly cumbersome if you have real
property in several states; each state requires it's
own probate "case." In addition to costing
more, the time and trouble involved with hiring multiple
attorneys and attending Court hearings all around the
country can be very taxing. A living trust avoids the
need for multiple probate cases and the 6% in probate
costs.
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LIVING
TRUST
The most exciting title arrangement that allows a person
to avoid probate is called the "living trust." The
living trust, or revocable trust, is a device which holds
all of your assets during life, allows you full control
over your assets, can give you and your heirs added protection
from creditors, and can efficiently distribute your assets
after your death avoiding the probate costs and delays.
A living trust is actually a pretty straightforward
device. It is simply a separate entity (analogous to
a corporation) which holds your assets. You retain complete
control over your assets while you are alive and mentally
competent. Upon your incapacity or death another person
(called the "trustee") steps into your shoes
and manages your assets for you. This trustee can be
a relative, a friend, or a professional fiduciary (like
a bank). Avoiding the probate process is critical, as
your trustee can distribute your assets in an expedient
manner to your heirs.
In addition to the shorter delay in distribution, a
trust also can make it more difficult for creditors to
collect money from you or your heirs; as they are forced
to sue the trustee or the beneficiaries, which can be
a time consuming process. This difficulty in collections
also carries over by analogy to relatives wanting to "contest" the
trust; as a trust is much more difficult to get overturned
than a traditional will.
One of the greatest features of the living trust is
that it enables you to avoid the need for a conservatorship
should you become incapacitated. A conservatorship is
a court administered process, similar to the probate
process, which costs you money and can be very frustrating
and time consuming for your heirs. Avoiding a conservatorship
may be even more important than avoiding the probate!
A fallacy has developed that living trusts are complicated
and burdensome to maintain; this is just not true. A
living trust is completely revocable and amendable. This
essentially means that it can provide for whatever you
want; and if it doesn't say it already, it can be added.
Except for the initial setting up of a trust, when our
offices get everything "placed" into the trust
(the "funding process"), you never have to
do anything different with your assets than if you owned
them outside of a trust.
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ESTATE & GIFT
TAXES
Regardless of which document is selected, a will or
a trust, there are other things that may need to be considered.
Most notable are tax planning devices. Currently, Federal
law allows each of us to give away during life or at
death $625,000 without incurring the wrath of the Federal
Gift and Estate tax scheme. In case you were not aware,
the Federal Estate tax tables quickly escalate to a 55%
tax, making proper planning important.
It is important to note that simply getting a trust
does not get around the tax problem. Special provisions
are needed within the trust to establish the tax savings.
These same provisions can also be placed into a will,
but it does not get around the probate problem discussed
above. The important thing is talking to an estate planning
attorney about this tax so that you and your family do
not fall prey to it.
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CONCLUSION
If you have minor children or assets of any kind, I
strongly urge you to consider putting together some sort
of estate plan. The first step is seeing an estate planning
attorney; myself or another qualified attorney. Although
it is easy to procrastinate on such an unpleasant topic,
I urge you to get it done and put it out of your mind.
In addition to planning, putting together an estate plan
can provide you and your family a lot of peace of mind!
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