Will or Trust? The issue has been raised as to whether a will or a living trust would be most appropriate in a particular situation. The following is a general explanation which outlines the advantages and applicability for both.
© 2011 Rajiv Nagaich
Wills and Trusts both accomplish the same goals, but differently. Both are ways to define who should get what from your estate upon your passing. But they go about doing it differently. A Will is a simpler way to address the issue. It is essentially a document that sets out who you are, who you consider to be your family members and heirs of your estate, who should manage the affairs upon your death and how the person managing the affairs should distribute the assets. You sign the document and then forget about it until you have changes to make or you pass away. Upon your passing a Will will create the issue of probate, which scares most people, in most cases for no good reason.
What is a probate? Probate is our social process that recognizes that we should have rules that prevent a legitimate creditor who is owed money by the person who has just passed away from being cheated out of what is owed the creditor. So how does a probate go about addressing this issue? It forces the executor, the person managing the estate, to publish a notice in certain publications to alert any creditor who may have a claim against the person who has just passed away about the death. The notice gives all creditors a four month window of time in which they must bring the claim against the estate so as not to be cheated out of what is rightfully owed them. After the four months creditors who fail to bring a claim give up the right to go to your heirs to claim the money owed them, which becomes a very powerful protection to your beneficiaries. So, the probate is a process which protects creditors as well as your heirs.
Why the concern over probate? Probates are to be avoided in certain situations, including:
1. If you live in California, Florida, New York or another jurisdiction where the cost of probate is a percentage of your gross estate. For example, in California, the cost of probate is 5% of the gross value of the estate. Under this scheme, the cost to probate a $500,000 estate is $25,000, an obscene amount of money by anyone’s standards. In Washington we do not have such provisions. Most estates we handle do settle for between $3,000 and $5,000, and they provide valuable protections to your heirs.
2.If your estate is valued at more than $2,000,000. Estates that exceed this value are subject to estate taxes. To minimize or eliminate the incidence of estate taxes sometimes attorneys will engage in entity based planning (Family Limited Partnerships, LLCs and the like). Under these circumstances creating a trust as an entity that can have an added affect of probate avoidance starts to make more sense. I have discussed how trusts avoid probate below.
3. You have real property in more than one state. Each state in which you have real estate you will need to go through a probate process. It is not the cost that is the only issue, it is the trouble to have to retain attorneys in several states and go through the process that sometimes makes avoiding multiple probates worthwhile.
4. You are in a second marriage situation and wish to keep the title of your respective assets separate. Trusts and entities are a good way to title assets you do not wish to co-mingle with the assets of a new spouse. Under these circumstances having a Will may not be as advantageous as having a trust based plan.
5. You have children who cannot wait to start fighting over your estate. Generally, feuds within family are fueled by having a Will in hand which gives the feuding parties ability to attack the various provisions. If the parties did not have access to your documents then fights are all the more remote to start. For this reason a Will may not be as appropriate when you have a sense that the children will be fighting. This is because a Will has to be filed with the court system after forty (40) days of death, whereas a trust never has to be filed.
6. Finally, if you do not wish the world to know who you consider to be your family or loved ones you do not want a Will. For most people, this is not a real concern and therefore a Will is not a bad alternative. If privacy is of paramount importance to you then a Will not serve you well.
How does a Trust avoid probates? A trust takes advantage of the rule that probate will only be invoked in estates that have more than $100,000 in probate assets or any real estate. So, what is a probate asset? Any asset that has a document to establish the identity of the owner (title to a car, deed to a house, account ownership papers for bank accounts, application for life insurance policies etc.), but do not establish who should inherit the asset upon death of the owner of the asset is defined as a probate asset. A title to a car, a bank account without a payable on death designation, deed to a house naming the husband and wife as owners but nothing more are good examples of probate assets. In contrast, a life insurance policy with a beneficiary designation, a deed with survivorship language, a bank account with payable on death designation are all good examples of NON-probate assets. So, the trick is to get all probate assets out of your name while you are alive. One way to do that is to first create a trust, which is recognized as a legal entity under law: And next to transfer all probate assets out to the trust. This way, when a person dies it can be said that the person died with less than $100,000 to his/her name and therefore a probate is not necessary.
Why are Trusts not appropriate for everyone? For estates that are under $2,000,000, the primary advantage of using a trust will be probate avoidance. The issue then is not whether the trusts are a very clever mechanism to avoid probate, rather the question is just because trusts are there should they be used. Put another way, just because probate can be avoided should it be? The answer to that question is – it depends! There are times when a probate should be avoided, as discussed above. And there are times when the complications that come with trusts make probate avoidance an exercise with limited benefits. Here are some complications with trusts:
1.They must be maintained, and at a cost. What many people do not understand that it is not enough to create a trust (get paperwork signed.) It must be funded. Funding a trust is taking the time to transfer each probate asset (bank account, car title, deed to the house and other real property etc.) and get the ownership changed to the trust. If the only thing that is done is to create the trust but not fund the trust, you will not only have to deal with the trust at the end of the day, but also have to go through a probate process if you died owning more than $100,000 in probate assets. And it costs time and money to get the trust funded. You can always fund the trust yourself and save costs, but it will still cost you time.
2. Refinancing can add an extra cost. A common issue that comes with refinancing a property that is held in a trust is that the refinancing company will want you to first take the property out of the trust and then they will refinance the house. And, if you want to keep your trust current you will then have to put the house back in the trust. This means an added cost that you did not anticipate with the refinancing of the house.
3. Safe Harbor Trusts in Living Trusts can be disallowed. The notion of a Safe Harbor Trust is that you can protect your assets from uncovered medical and long term care costs by accessing Medicaid benefits. This is possible because the Safe Harbor Trusts are sanctioned by law. But, what the federal and state statutes enabling the creation of the trust say is that the Safe Harbor Trust must be created inside of a ‘Will.’ This means that Safe Harbor Trusts created inside Living Trusts can be set aside by Medicaid. There is no published case in any of our fifty states where a state has refused to honor the Safe Harbor Trust created inside of a Living Trust, but as we are grappling to limit our expenditures as a state and nation I can only anticipate someone to be the first test case where the benefits are declined. For this reason I would have you balance the risk of having the Safe Harbor Trust not honored vs. having a Will based plan with the issue of probate. There is no right or wrong answer, it is a question of how risk averse you are.
4. They are expensive to create. Finally, if the trust is created by competent counsel and not a trust mill, it will be more expensive than creating a Will based plan. Essentially, you will be prepaying part of the probate costs and if the only benefit you get from a trust is probate avoidance, I would suggest that you not spend more than you have to. Probate is not that expensive and will not create delays if all your beneficiaries cooperate. And if they don’t a trust will not be very helpful in solving sibling or beneficiary disputes.
Planning with a Living Trust. The biggest difference between creating a Living Trust rather than having a Will as part of your estate plan is the avoidance of probate proceedings in multiple states. The decisions on who will manage your final affairs and how your estate will be distributed can be addressed inside of a Living Trust just as they would be with a Will. However, creating a Living Trust avoids the need for probate proceedings in every state in which you own real property. Creating a Living Trust involves transferring most, if not all, of your assets into the name of the Trust. The Trust would then own these assets, and you would manage and benefit from the assets in the Trust without giving up control, essentially becoming the “constructive owner” of your assets. But because the Trust is the owner of your assets, your estate would not be subject to probate proceedings in order to transfer ownership upon your death. This minimizes costs and is a much more efficient way to manage your estate upon your passing. It is revocable at any time, which means at any time you may dissolve the trust, for whatever reason. Upon your death, your alternate Trustee will perform the duties customarily associated with an executor of a Will.
Planning with a Will. Using a Will to direct the distribution of your estate makes for easier administration while you are still living. Although not overly-complicated or time consuming, a Living Trust needs to be maintained during your lifetime. This requires you to make sure that most, if not all property you own, especially real property outside the state of Washington, needs to be titled in the name of the Trust. When you acquire real property, open new accounts, and dispose of assets, some trust management is involved. But planning with a Will ensures that your estate will be subject to probate in every state where you own real property, and the costs associated with multiple probate proceedings often outweighs the minor inconvenience of maintaining a Living Trust. By keeping your Living Trust up to date, you should be able to avoid probate proceedings altogether, and the task of distributing your assets after you both pass away will be easier for your Trustee.
Using a Will or a Living Trust. One of the issues sometimes that runs through the minds of my clients is why not plan using a trust?
Safe Harbor Trusts are statutory creatures and the federal and state statutes require that they be created inside of a Will, though in cases where it was created inside of a trust there is no published case that has disqualified the trust. That said, as the states and feds grapple with budgetary issues I fear that it is only a matter of time before some state will refuse to recognize the Safe Harbor Trust unless it is created inside of a Will.
- Function of Wills and Trusts. At the end of the day, both processes will accomplish the same objective – they define who gets what from your estate when you are gone. But they go about doing it differently.
- Planning with a Will. Contrary what most individuals who prepare a Will think, with a Will based plan your estate will go through a probate process while a trust based plan will help you avoid the probate process. In other words, a Will causes a probate and does not prevent it.
- What is probate? Probate is our social system whereby we want to make sure that when a person dies, his/her assets first are made available to any of the decedent’s creditors before the heirs benefit from the estate. It would be patently unfair to have the children inherit property where the decedent died owing medical bills to a hospital, or funeral expenses, or past debts to others. For this purpose, the probate process requires that estates that hold any real property or probate assets more than $100,000 must give potential creditors the opportunity to have their claims addressed before the heirs get their inheritance. Paradoxically, the same process also provides significant protections for the beneficiaries in that creditors who do not bring their claim within the four month required period will lose the right to go after the heirs once they have inherited the assets from the estate. In a nutshell, the probate process is protection for both the creditors and heirs.
- Does every person who dies in Washington have to go through a probate process? No. Only individuals who own any real property in Washington or more than $100,000 in probate assets will have to go through a probate process.
- What are probate assets? A probate asset is any asset without a designated beneficiary designation. A good example would be a bank account that does not have any payable on death designations or is held as tenancy in common (if owned by more than two individuals). Another example would be a deed to a home where the ownership is readily identifiable but there is no indication as to who should inherit the home should the owner pass away. When another document outside of the deed (or title or other ownership document) is required to be reviewed in order to determine who will inherit the asset (such as a Will or trust or state statutes) it becomes a probate asset.
Why do people recommend against probate? And should probates be avoided? There are two primary objections that are raised against the probate process: (i) it is expensive; and (ii) it causes delays. These objections are not necessarily accurate in our state. Probate costs in certain jurisdictions such as California, Florida etc. are a percentage of the gross value of the estate. In California the costs are about 5% of the total value. This means that if you were located in California and your estate had to go through a probate the total costs would be about $50,000. Such costs do justify the creation of trusts to avoid probate. In Washington we have no such rules. Here the typical probate will cost between $3,500 and $4,000 (our office experience). Creating a trust based plan can sometimes mean little more than prepaying the probate costs, which is not warranted in most cases. The next objection of delay is geared towards the requirement that a probate go through a statutory process of publishing a four month notice (unless an adjudicated probated is opted for). This means that a typical probate will mean that the court process is open for between six to nine months. Any greater details are not on account for the legal requirements, but the transactional delays. For example, the estate may not be able to close the sale which could cause the delay of the probate. This would also cause a trust to remain in administration mode until the house is sold. In my experience there is little truth to the fact that probates will cause delays any more than trust administration would, absent a handful of cases.
How do trusts avoid probate? A full probate will only be required in those estates where there is real property or more than $100,000 in probate assets. A probate asset is any asset without a designated beneficiary designation. A good example would be a bank account that does not have any payable on death designations or is held as tenancy in common (if owned by more than two individuals). Another example would be a deed to a home where the ownership is readily identifiable but there is no indication as to who should inherit the home should the owner pass away. When another document outside of the deed (or title or other ownership document) is required to be reviewed in order to determine who will inherit the asset (such as a Will or trust or state statutes) it becomes a probate asset. So, one easy way to avoid probate is to take all probate assets and real property out of the name of the owner. This is accomplished by first creating a trust, a legal entity recognized by law that can buy, sell, own, hold and trade assets (among other acts). Once a trust is created the owner then transfers assets to the trust thereby creating a situation that at the time of the owner’s death he/she owned no assets and hence there is no probate.
When is a trust appropriate? Additionally, given that you do not have any estate tax issues to plan around at the present time, the only significant purpose the trust will serve will be to avoid probate. And probate avoidance in our state is simply not a big enough reason to spend the extra funds necessary to create and fund a trust where a Will would address the issues just as effectively. Though there is a legitimate debate of why trusts might be better, I remain unconvinced that unless a client as one of the following reasons to create a trust that a Will should not be adopted as the preferred planning tool. The reasons include: (i) real property owned in multiple jurisdictions; (ii) estate valued at over $4 Million; (iii) client desires total privacy and does not want the world to know who has been named as the beneficiary in the Will; (iv) second marriage situations where there is a strong desire to keep certain assets as separate assets; and (v) where there is a risk that the beneficiaries might pursue legal recourse to upset the Will provisions. Absent these issues in an estate I think a Will serves the needs of most Washingtonians better than a trust.
Drawbacks to a trust. Though trusts are appropriate in some situations, they are not without complications. Here are some examples of issues that you have to be concerned with:
- Trusts prove to be expensive and must be maintained. Assets must be funded.
- They can complicate life. In retirement years, simplicity is better than confusion.
Concerns with a Living Trust. There are some concerns with using the Living Trust as an estate planning tool rather than a Will when it comes to protecting assets from the potentially high cost of long term care. If you decide to incorporate only a Credit Shelter Trust, this can be accomplished through either a Will or a Living Trust. However, a Safe Harbor Trust established in a Living Trust is susceptible to challenge and there is a chance that it will not accomplish the goal of asset protection, whereas establishing a Safe Harbor Trust through a Will without any doubt is sanctioned under federal statute. So while a Safe Harbor Trust can be designed as part of a Living Trust, there is some uncertainty as to whether it will ultimately be effective, and we would not know that unless or until it is challenged in court. Remember, the goal accomplished with the Safe Harbor Trust is to protect the decedent spouse’s share of the estate so that it is not subject to Medicaid asset limitation rules should the surviving spouse require long-term care, which will make those assets available to supplement where Medicaid falls short in providing a greater quality of life, and preserve the decedent’s assets as much as possible.
A trust only allows you to avoid probate and to keep things very private. A Will will cause you to have to go through probate in Washington and other states if you own real property in multiple states. A will does simplify life somewhat in future as you do not have to remember to constantly fund your trust, as discussed above. In the end, what you have to ask is how important is the protecting your assets from potential uncovered medical and long term care costs by qualifying you for VA or Medicaid benefits? If it is critical, then perhaps you should consider a Will based plan. If you are comfortable knowing that though the safe harbor trust inside of a Will is not what the statute calls for but there is also no case that disqualifies the trust and you are willing to take a chance on it then you can stick to your trust based plan.
Credit Shelter Trusts. As discussed above, the estate tax exemption limit at both the state and federal level allows each individual to pass a certain amount of their estate to their heirs tax-free. Although a married couple will often want to leave their estate directly to the surviving spouse, this is not advisable. Upon the death of the first spouse, the surviving spouse’s estate would then consist of all property held by the marital community. This creates a taxable estate upon the death of the surviving spouse because the total value of the husband and wife’s estate is included in the surviving spouse’s estate. In order for both of you to take advantage of your Washington State estate tax exemption limits, a Credit Shelter Trust should be designed inside of your Will or Living Trust, whereby the decedent spouse leaves their portion of the estate to a Credit Shelter Trust (CST) for the benefit of the surviving spouse, rather than directly to the surviving spouse. The decedent spouse’s estate can use the exemption limits when transferring assets to the CST, and the surviving spouse can use their tax exemption limit upon their death to transfer property that is not included in the CST.
Example: Husband and wife, together, have an estate worth $3 Million, or $1.5 Million each. Upon the death of the husband, if he leaves his entire estate directly to his wife, no state estate taxes are due because of the unlimited marital deduction. However, the wife’s estate is now worth $3 Million. Upon the wife’s death, her estate would have a $2 million exemption, but would pay taxes on the remaining $1 Million that could not pass tax-free. If the husband left his $1.5 Million to a CST with the wife as the beneficiary, the CST is not included in the wife’s estate and at the time of the wife’s death her estate would be valued at $1.5 million, so no state estate tax would be due.
As an additional benefit, the Credit Shelter Trust allows you to control your separate assets even after you are gone. Your share of the estate can be made available for your spouse’s needs, but all assets in the trust that remain after your spouse’s death will pass to the heirs of your choosing. This provides you with the opportunity to keep your separate assets separate, and eventually have your own heirs inherit while still providing for the surviving spouse.
Minimizing or eliminating estate taxes through the use of a tax shelter trust, called a Credit Shelter Trust, can be accomplished with either a Will-based plan or a Living Trust-based plan. Traditional concerns of naming beneficiaries and controlling distribution of inheritance can also be accomplished with either plan, as well as addressing quality of life issues and ensuring your resources are put to their most effective use in providing for your care. Whether you decide to use a Will or a Living Trust to accomplish these goals depends on the nature of your assets and your desire to avoid the probate process.
Conclusion. So, should you avoid probate and go with a Trust? For most Washingtonians, I would suggest that a Will based plan will serve them just as well. It will give your heirs some benefits a trust will not and will prove to be easy to manage and less expensive. In the end, the choice is yours and yours alone.
 For unmarried individuals the state will impose a state estate tax for assets that exceed $2,000,000 at the time of death; for federal estate tax purposes the number currently is $5,000,000. By extension, then, a married couple should be able to avoid any incidence of state estate tax by engaging in minimal and simple estate tax planning for estates valued at or below $4,000,000 ($10,000,000 for federal estate tax purposes). In other words, some level of planning is required for estate’s that exceed $2,000,000 to avoid any incidence of estate taxes. The larger the estate the more complicated the planning options.