WILL OR A LIVING TRUST: COMPARING AND CONTRASTING TWO ESTATE PLANNING DEVICESBoth wills and living trusts are designed to pass on assets at death, but they use different methods to do it. What follows is a basic primer on wills and living trusts, with a table to compare and contrast the two techniques.
Primer on WillsA will isn’t made official until the testator (the maker of the will) dies and a judge confirms the validity of the will and appoints an executor. Many people falsely believe that if you make a will, you avoid probate. If you make a will, it may have to be probated (declared valid by a judge), but the making of a will itself doesn’t avoid probate.
A will doesn’t assist a testator with property management while the testator is still alive. If a person is still alive, but incapable of handling his or her affairs, then the court appointment of a conservator may be necessary. It may be possible to avoid a conservatorship if the person has appointed someone else to take care of his or her affairs in an executed a general durable power of attorney.
Upon a person’s death, the provisions made in a testator’s will do not control the disposition of non-probate assets. Examples of non-probate assets include, but are not limited to, bank accounts set up as joint with right of survivorship, life insurance policies with beneficiary designations, payable on death (POD) accounts, transfer on death (TOD) accounts, retirement plan/401K/IRA accounts with beneficiary designations.
There are many people who execute a will, then try to be helpful by setting up some of the above accounts not realizing that the joint owner or beneficiary will receive the asset outright, regardless of what it says in the will.
A will is probated in the state and county where the decedent resides at the time of his death. For example, if a person is a legal resident of Shelby County, Tennessee and dies while on vacation in Colorado, the proper place to probate the testator’s will is Shelby County, Tennessee.
A separate probate is required in each state and county where the decedent owned real estate. This is called an “ancillary” probate.
As a general rule, a will that is valid in the state where it was executed remains valid even if the testator moves to another state. However, any ambiguities or omissions are interpreted by the laws of the state of the decedent’s domicile, not the state where the will was executed.
Wills are amended by codicils, which must be executed with the same formalities as the original will.
When a testator dies, his or her will may need to be probated. The executor of the will is charged with getting the will admitted to probate, notifying beneficiaries of the death, notifying creditors of the death, paying valid claims, notifying the Bureau of TennCare of the death, filing an inventory, preparing an accounting(s), filing state inheritance and federal estate tax returns, and finally, distributing the net estate to the beneficiaries. All of these duties are performed under the guidance of the court, and the executor must notify the court that all of the duties have been fulfilled before the estate can be closed.
Wills are usually easy and cheaper up front, but require more effort and are more expensive later on. They are back-loaded, with the heirs assuming the burdens.
Primer on Living TrustsTrusts have been around for hundreds of years. They are contractual in nature, unlike wills, which rely on a state’s statutory and case law for interpretation. Trusts are more transportable than wills because there is less state-to-state variation in trust law and its interpretations.
Generally, trusts are more complex than wills, therefore, they are often longer and more precise.
Each trust has three parties--a grantor/settlor/trustmaker, a trustee, and a beneficiary. One person can serve in all three roles.
Generally, trusts are not usually required to become public knowledge. They are private, unless challenged, which seldom occurs.
A living trust is the common name for a revocable inter vivos trust. This type of trust can be revoked. It is an alter ego of the grantor; it’s transparent for income tax purposes and it’s not required to have a tax identification number or file a separate tax return.
A living trust is designed so that assets in the trust are not a part of the probate process. Assets must be titled in the name of the trust, otherwise they will not avoid probate.
The process of transferring title from an individual to a trust is called “funding.” It is a total waste of time and money to set up a trust and then not fund it. This is where do-it-yourself trusts fail miserably. They may help you create the trust itself, but they do not assist in any way with the funding of it.
Once assets are transferred to the trust, the trust is the legal owner of the assets.
Generally, the grantor of a living trust retains all rights to manage the trust as he or she wishes while alive and legally competent. Assets can be added to or taken out of the trust without asking or telling anyone and without generating any tax consequences. The trust can be terminated or modified at any time.
In addition to avoiding probate, another major benefit of a living trust is that it provides for a successor trustee than can take over and manage the trust when a grantor becomes incapable of handling his or her affairs through disability or death. The grantor can determine what amounts to disability. Usually two licensed physicians sign a written statement that the grantor has lost the ability to carry on his or her affairs. No court action is necessary.
When the grantor dies, the terms of the trust determine who is to get the benefit of the trust. The distribution is private and does not need court supervision. The successor trustee can step in immediately after death and does not have to wait to be appointed executor by the court.
Trust contests are much less common than will contests and more difficult to pull off. Also, trust assets generally are not immediately frozen upon a contest, unlike estate assets.
Trusts are more work and more expensive up front, but usually must less work and less expensive later on. Trusts are front-loaded, leaving less burden later on a surviving spouse, children or other heirs.