Should I have a Trust or a Will?

What is a will-based plan?

What is a trust-based plan?

A trust-based plan, unsurprisingly, contains a trust as the main estate planning document. A trust is a fiduciary arrangement that permits a trustee to hold assets for one or more beneficiaries. Typically, the person who establishes the trust, called the trustor or settlor, nominates themselves as the trustee of the trust during their lifetime so that they can manage the trust directly. The trust also nominates a successor trustee, who is the person in charge of the trust administration once the initial trustee passes away or is incapacitated. The successor trustee follows the terms in the trust to carry out the decedent’s wishes with respect to who is to receive trust assets and in what manner.

The trust is typically established as a living trust, which means it is revocable during the lifetime of the trust settlor. A trust-based plan also includes a will, but the will’s purpose is to leave any asset left out of the trust to the trust. Such a will is called a pour-over will, because it “pours over” to the trust.

What is a testamentary trust?

What is the main difference between a will-based plan and a trust-based plan?

Probate Avoidance.

A will and trust both work to accomplish several of the same estate planning goals. However, the main difference between the two is that a trust-based plan avoids the need for a probate. A will-based estate plan is designed to go through probate and is written to streamline the process to the extent possible. A trust-based plan goes through a formal trust administration process, but such a process is typically not done with any court supervision.

What is probate?

Probate is a legal process in which a court oversees the administration of a decedent’s estate. A probate is required when a decedent dies with a property that is subject to probate and is over a certain monetary value. Property subject to probate passes under the terms of a will, or if the decedent died with no will (died intestate), under the laws of intestacy. Real property, for example, that is owned solely in the decedent’s name is typically considered to be a probate asset. Non-probate assets typically pass via beneficiary designation, such as retirement accounts, life insurance, and payable-on-death accounts. The probate process is started by an individual, who is typically the person nominated as the personal representative, filing a will and probate petition with a court. After a court appoints the personal representative for the estate, that personal representative must take several steps before the estate is closed and assets are distributed to the beneficiaries. Because a probate is administered by a court and is a matter of public record, it does not offer privacy with respect to the estate’s proceedings or beneficiaries.

How Does a Trust Avoid Probate?

A trust avoids probate by converting assets which otherwise would be passing under the terms of a will through probate into non-probate assets. This is done by re-titling such assets in an individual’s name to the name of the trust. This step is referred to as funding the trust and should be attended to with care as it is commonly done incorrectly or forgotten about. Different types of assets involve different processes of re-titling. Real property, for example, involves a new deed in which the owners transfer the property to the trust. Alternatively, re-titling a brokerage account involves working with the institution holding the account to re-title the account in the name of the trust. Through the process of funding a trust, assets that would otherwise pass through probate will instead pass under the terms of the trust.

What does a trust administration involve?

After the death of the trust settlor, a formal administration process must still occur. Such a process involves many of the same steps that the personal representative in a probate must take, however, this process happens outside of court. A trustee must still deal with creditors, file taxes, and take care of the other matters involved with wrapping up the decedent’s affairs. A trustee, however, does not need to wait until being appointed by a judge in order to begin the administration process and can instead start dealing with assets and other matters of an estate right away.

What are other differences between a will-based plan and a trust-based plan?

Maintenance of Plan During Lifetime.

A trust-based plan takes more work to maintain during a person’s lifetime. Properly funding a trust is a critical part of maintaining a trust-based plan. With every new asset you get during your lifetime, with a trust-based plan you need to be mindful of the way in which such asset is titled. For example, if a new piece of property is purchased, such property should be titled in the name of the trust. If you pass away with an asset that is not titled in the trust and such asset is a probate asset, then a probate must be filed in order for that asset to pass to the trust. The work and cost in setting up a trust to avoid probate can be negated by such a scenario.

With a will-based plan, you do not need to worry about re-titling assets because assets in your name, which are not otherwise passing via a beneficiary designation (probate assets), will be distributed according to your will.

Initial Investment.

A trust-based plan is more costly to set up during your lifetime because it requires you to prepare more documents and receive more guidance regarding how to re-title assets to fund the trust. A reasonable expectation is that a trust-based plan will cost about twice as much as a will-based plan. With a properly funded trust, the additional cost to set up the trust-pays off with the cost saved in probate fees. As discussed above, a trust still must go through an administrative process, but such a process is less costly and less work for the person in charge of administering the trust.

Incapacity Planning.

Both a trust-based plan and will-based plan typically include financial and medical powers of attorney. A power of attorney is a document that allows an appointed person, called the agent, to make decisions for you while you are still living, but are unable to make financial or medical decisions because you lack mental capacity. Financial institutions, however, can be skeptical about recognizing an agent’s authority under a financial power of attorney. With a trust-based plan, powers of attorney, while still important, have less of a role. A trust allows you to nominate a successor trustee who may step up as trustee during your lifetime to help manage financial matters of the trust. It is common that an elderly individual adds a trusted adult child as a co-trustee of their trust to allow them to more easily assist with managing financial matters during their lifetime. Financial institutions are generally more comfortable in accepting a trustee’s authority to act with respect to an individual’s assets as authorized by the trust than an agent’s authority to act with respect to an individual’s assets as authorized by a financial power of attorney.

Final Thoughts