Will-Based Estate Planning Versus Trust-Based Estate Planning
Estate planning comes in two basic flavors: will-based estate planning and trust-based estate planning. Deciding on which to use depends heavily on your personal situation. Although, the trend is that our older and more wealthier clients often opt for trust-based planning while our younger and less wealthier clients often opt for will-based planning. The reason for this is simple: trusts offer numerous protections for both older people and their wealth.
Wills are usually very simple instruments that most people can easily understand. They nominate an executor to round up the deceased person’s property while also nominating heirs to receive that property. There are numerous other concerns and nuances, but generally speaking, that’s about all there is to it.
When the testator (the person who wrote the will) dies, the will must be probated to give legal effect to the testator’s wishes, meaning a judge must inspect the will and hear evidence as to its validity. If the judge likes what he hears, then the will is admitted to probate, and the executor is officially appointed. The executor then marshals all the property belonging to the deceased person, pays any valid creditor claims, and passes the remaining balance to the heirs.
This process is sometimes costly and lengthy. It is also a matter of public record, and unfortunately, it also has a propensity to devolve into a conflict in open court between heirs. The last thing any of us wants to leave our heirs is a potential lawsuit. Instead, when we die, we want a smooth and orderly transition of family wealth to successive generations.
A smooth and orderly transition of wealth is often more easily accomplished with a living trust. Trusts are much more comprehensive than a will. In short, a living trust is a legal entity that holds title to your property so that your assets are not held in your individual name, thus triggering a need for probate to transfer title out your name and into the heirs’ names when you die. Unlike the probate estate that is created only when the will is successfully offered for probate, the trust creates an estate immediately, while you are alive. As trustee of that trust estate, you manage the property. You control the distributions of trust funds throughout your lifetime. You decide who the beneficiaries are, what they are entitled to, under what conditions, and when.
Because of its thoroughness, the trust enables us to provide much more robust planning while maintaining control over the trust estate. For instance, trusts often include planning to minimize potential federal estate taxes, navigate complicated remarriage scenarios, provide for the costs of long term care, marginalize the threat of lawsuit creditors or predators, incentivize our heirs prior to them receiving their share of the inheritance, and to maintain orderly management of a family business.
An additional benefit that the trust has over the will is disability planning. If you become incapacitated, you may not be able to manage your financial affairs yourself. If you have a will, your loved ones might be forced into pursuing a guardianship over you. This can be a costly, lengthy, and sometime humiliating legal process for you and your loved ones to endure. The trust, however, simply appoints a new trustee to manage the property for your benefit upon your incapacity, thus avoiding the need for guardianship. Then, once you pass away, the trust appoints a new trustee to transfer trust property to your heirs.
Entire books have been written to compare wills and trusts. Without going into the minutiae, an excellent rule of thumb to distinguish between the two is this: if you are in retirement or if you have a sizable estate, then a living trust is likely the better route to secure and protect you and your estate.