11 Dec 2013

Which should you choose? A will or a trust? What is the difference between the two? Both a will and a trust protect assets and indicate who will receive them upon your death, however, they work very differently. Let’s take a deeper look at wills vs trusts.

For many people, whether a will and power of attorney or a revocable living trust is best for them is their first consideration in Estate Planning. Most want to know which one is better at accomplishing their estate planning goals. In almost every case the trust will handle each of those tasks better than a will and powers of attorney. However, the decision of which one to use in most situations is resolved by looking at the cost versus the benefit. Will the extra upfront cost of creating a living trust generate enough savings of time or money for you or your heirs it is the right choice.

Wills

A will spells out how your property will be distributed when you die. It cannot make any provision if you become incapacitated. It can be revoked or amended any time before your death. A will still requires a family to go through a court process known as probate, which can take time and be expensive.

Trust

A trust is a written agreement designating a trustee who will be responsible for managing your property. If you are healthy, generally you remain the trustee, but you can name another to fill in at any time should you become ill or become incapacitated. When you die with a trust in place, the assets are transferred directly to your heirs without the lengthy probate process.

Most people do estate planning for one or more of these four goals:

  • To minimize taxes. Usually, but not always, that means estate taxes.
  • To avoid probate, or to simplify matters for their heirs or successors.
  • To control the way their assets are used after their death.
  • To make it easier for someone to handle their affairs if their own incapacity occurs or disability.

So how do those four estate planning goals relate to the wills vs. trust question?

Taxes

Few people must worry very much about estate taxes these days. With a federal estate tax exemption set at $5.25 million in 2013, and no Arizona state estate tax at all, only a tiny fraction of clients have estates large enough to make their decisions on the basis of tax effect.

Probate avoidance

Arizona’s probate process is not nearly as complicated as people think and can often be done by non-lawyers. It is also not nearly as expensive. The main concerns with probate is that is public – everyone can see the will and assets under probate – and that it is often difficult to get this done when a family is grieving. And, of course, if someone objects and a family or creditor dispute arises, the costs and time needed will escalate.

What most clients say is that even with modest probate costs, going through the legal steps at a time of emotional upheaval is something they wish they could have avoided. In Arizona, the cost of preparing a living trust (and “funding” it — transferring all your assets into the trust’s name) will usually be less than the cost of probating your estate later. But not necessarily by much.

If you are married, you are probably comfortable putting most or all of your assets in “joint tenancy with right of survivorship” or designating your spouse or children as beneficiaries. This can lead to problems when the property goes to the next generation or, yikes, to a new spouse. Putting children or other beneficiaries on your bank and stock accounts as joint owners is almost never a good thing to do.

Control

What you do with your assets while you are alive or what you want to happen after your death is a question of control. There are many situations where members of your family should not get outright control of their inheritance whether you are alive or not. Perhaps you wish to leave a legacy for your children or grandchildren for their schooling or other similar goals. The best way to address these types of issues is, in my thinking, is by using a trust with a trustee who you instruct on what you want accomplished.

While you can create a trust in your will — what we lawyers call a “testamentary” trust, it will cost you more than a will without such a trust, and the difference between the cost of a will (with your testamentary trust) and a living trust will shrink. So if you need (or just want) to control the uses of your funds after your death, you might be a better candidate for a living trust.

Your own incapacity

This is why you should sign a power of attorney. It is simultaneously one of the most important documents in your estate plan, and the single most dangerous one. The cost of going through the courts (in a probate-like proceeding called a conservatorship) is usually high and the invasion of privacy significant.

There are some times when a power of attorney just won’t solve the problem, though. Plus it is hard to predict when those times arise. Banks, title companies, the federal and state governments — none of them are required to accept the power of attorney and many do not. If you sign a living trust and transfer all of your assets to it, though, the problem becomes simpler and narrower: if your successor trustee can show the item the trust calls for (like a letter from your doctor, for instance), then the successor trustee just takes over. There will probably be somewhat fewer problems administering your affairs with a living trust than with a power of attorney.

Conclusion

So should you be considering a living trust as part of your estate plan? Each situation is obviously different, but at a minimum if you fit into one or more of these following categoris, you may be a a better candidate for a living trust rather than just a will:

  • You are older
  • You are not married or if you are married, don’t want to use joint ownership as your estate plan
  • You are wealthy and may face estate taxes
  • You have children who are not children of your spouse
  • You have complicated assets
  • You have real estate in more than one state
  • You have beneficiaries with special needs, inability to handle money or other similar considerations

Clearly, this is just a broad outline of some general issues regarding wills vs trusts to generate some thought. You should be making your decision with legal counsel about what is best for your circumstances after a full evaluation.

Call today if you have questions regarding which you should use to protect your assets.

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