When people come to our office for estate planning, they often start by asking us whether they need a will or a trust.
The very short answer is, of course, that it depends. Wills and trusts are tools. The right tool for each client will depend on the client’s family situation, asset situation, and goals for their plan. Historically, about half of our plans have been will-based plans, and half trusts.
That being said, there are some common reasons to choose one tool over another. This post explains how each option works and the common reasons we might recommend one over another.
Wills
Wills are the easiest plan to put in place. When we use wills to implement a plan, we prepare first drafts based on decisions made during our initial consultation. The client reviews the drafts, makes any needed changes, and ultimately reviews and sign in our office. Following signing, the client will need to follow instructions for updating beneficiaries on retirement accounts.
This makes wills the easiest and most affordable option at the planning stage. However, if wills are chosen to implement your plan, your estate will be settled through the probate process.
Probate is a court supervised process to make sure your assets are distributed according to your will. Although probate is not as difficult as is commonly believed, the probate process requires notice to all of your closest living relatives before the administrator can begin administering the estate, even if they are not included as beneficiaries in the plan. This can create problems for people without children who are giving everything to charity or a select group of relatives, or parents who are not including all of their children in their plan.
In addition, there are additional costs and fees associated with probate that make the overall cost of wills and probate higher than the overall cost of creating and settling a revocable trust. How significant those additional costs are will depend on the decedent’s family structure, asset structure, and plan. The more people and assets involved, the higher the costs.
We often recommend wills when:
You want an easy and simple plan to implement, and would prefer not to spend time updating beneficiaries and titling assets in a trust.
You have young children and plan on changing your plan in the future when they become adults.
The cost of the plan is the deciding factor.
Your assets would be under the $50K minimum for a probate proceeding.
A probate would be a relatively simple process based on your family and asset situation.
Revocable Trusts
The initial part of creating a revocable trust is very similar to creating a will. We prepare a first draft following our initial meeting. You have a chance to review the drafts, make any needed changes, and review and sign in our office. The key document is a revocable trust document rather than a will, but the information in it (the names, distribution scheme, and so on) are all the same.
From there, however, there is more work to be done to ensure the trust will work as intended. Think of a revocable trust as a bucket that is designed to catch assets before they end up in a probate process. To ensure assets end up in the bucket, we must update beneficiaries or retitle all assets to make sure they flow into the trust “bucket.” We also must ensure that all assets not flowing through the trust (typically, retirement plans) are flowing directly to the correct beneficiaries. So, for example, we will draft deeds transferring real estate into the trust, and update beneficiaries on bank accounts so that the trust to receive those accounts at the death of the owner without probate.
A properly funded revocable trust will avoid probate. At the death of the trust creator, rather than going to court, the administrator can use the trust document to sell real estate, get control of bank accounts, and so on. The administrator still has work to do—they must still do the work to sell real estate, control bank accounts, keep records, and so on—but the work happens outside the court process. That means the settlement work happens more quickly, is easier for administrators, and results in lower attorney’s fees and no court costs.
However, because of this additional funding work, the work and cost involved in creating a revocable trust is greater than that for wills.
We often recommend a trust when:
You are looking for the most overall cost effective plan (cost of plan + cost of settling estate).
You are willing to spend the time necessary to re-title assets into the trust name and update all beneficiaries.
You would like to avoid financial information ending up in court records.
You are not including all of your children or (if you have no children) all of your closest relatives as beneficiaries in your plan.
You have complex assets (such as business interests or multiple real estate holdings).
You own real estate in more than one state.
You are including a large number of beneficiaries in your plan.
Some beneficiaries will be receiving funds in a trust fund rather than directly (this may be a trust fund for a young person, such as a grandchild, or for a person with a disability).
You have a large dollar amount of assets that would otherwise flow through probate. (Large is in the eye of the beholder, but the probate court fee is $200/$100,000, or $2,000 per $1M. Avoiding probate avoids this fee.)
A word of caution—because trusts are settled outside of probate, there is no built-in court supervision of the administrator. Selecting an honest, diligent administrator is always critical, but it becomes even more important when choosing to use a trust.
Close Calls
In many cases, people have a relatively simple asset and family situation. (Think of a married couple that is leaving everything to their three children equally, own their home, and have a couple of checking and savings accounts and a brokerage and IRAs with their financial advisor.) Their family structure is simple and asset structure is simple. What will be the best option for them?
In those cases, this is a judgment call for the client. We do not make a strong recommendation either way. We encourage clients in this situation to think in terms of overriding goals. If the goal is doing a solid, simple plan that leaves a bit more work for the kids on the settlement side, a will is going to be the best option. If the goal is to make everything as easy for the kids as possible, understanding that may be a bit more work now, then a trust will be the best option.
We are happy to discuss this further as part of an initial consultation.
Taking the Next Step
Do you have questions about which plan is best for you and your family situation? We are happy to meet with you and answer your questions. Schedule online or contact our office today to schedule a no-obligation initial consultation.