Recently, many clients have asked about creating revocable trusts for estate planning, rather than a traditional Will. They have heard that probate is a horrible thing, and that a trust is a smart and easy alternative. However, the truth is that whether a Will, a trust, or another alternative is appropriate for you will depend on your personal circumstances.
Using a Will, you can give specific gifts, limit the use of property, or create sophisticated instructions, so that your wishes are carried out after you have passed away. But, a Will generally has to be probated, which means the Will is submitted to the court and a legal process must be followed.
Historically, the probate process was very formal and cumbersome. However, in the past few decades, most courts have modified the probate process to be much more efficient and cost-effective.
Significant costs and time can be required when there is a dispute in the family or a significant amount of property with very detailed instructions to follow. But, depending on what kind of property the person has when they pass away, and how the family interacts with each other, probating a Will can be a fairly easy process.
Both revocable and irrevocable trusts have become very popular for estate planning, because they can avoid probate (meaning you don’t have to file anything with a court), and there can be major tax benefits (and consequences). For this blog, I will only discuss revocable trusts, because irrevocable trusts have much more serious tax consequences (and I am not a tax attorney).
The main benefits of a revocable trust are that 1) you can avoid probate, which may be expensive, and 2) you can actively manage the trust while you are alive to adapt to changed circumstances and family dynamics.
But, the main downsides to creating a revocable trust for estate planning are 1) trusts are generally more expensive than Wills to create and fund properly (i.e. the cost is upfront, rather than after you pass away), and 2) you have to transfer your property into the trust, which can create unintended consequences. Because the trust is revocable, you can transfer the property back to yourself, if necessary, but that will un-do the benefit of creating the trust.
Trusts may also require much more active management and accounting to maintain. In comparison, once a Will is created, it essentially sits on a shelf (or in a fire-proof safe) until a person dies and the probate process begins.
A trust can also be a very useful tool for parents who have children under the age of 18. If property is held in trust and the parents die, a successor (or second) trustee can be nominated and the property can be held and managed for the children until they are old enough to get it. This is one of the primary reasons my clients ask me to create trusts. However, the parents need to understand that major items, such as your home, need to be transferred into the trust right away for the benefits of the trust to work.
Transferring property into the trust raises issues with deeds, titles, insurance, and several other factors, which may negate the benefit of setting up the trust in the first place.
Depending on the kind of property you have and how much instruction you want to provide following your death, there are several alternatives to both Wills and trusts.
For example, if you do not own any real estate and have minimal personal property (generally less than $60,000), your property can be collected and distributed by affidavit, and will not require probate.
Similarly, if your home or other real property is held in joint tenancy with another person, title to the property will transfer to the other person the instant that you pass away, and no probate is necessary.
Many investment accounts and other financial instruments also have pay-on-death or beneficiary designations, which will give the investments to the beneficiary once you pass away (again without probate).
So, depending on who you are, what you own, and what you want to do, there may be several other options available for your estate planning. A Will may be a simple and straightforward tool for you; a trust may meet the complexity you are looking for; or, a combination of real estate, investment, and health care plans can also meet your needs.