For decades a debate raged in legal circles about which documents were better – wills or trusts. Members of the public didn’t really know the difference, but there was a perception that trusts were more complicated and expensive – and were primarily for wealthy people.
Those who favored trusts told the story of Ellen. When Ellen’s husband Joe died, Ellen found that most of the family’s property was in Joe’s name. Joe had a will, but because the property was titled in Joe’s name, Ellen first had to go through probate in order to be able to use the property. The probate process seemed to drag on and was pretty costly to Ellen. She even had to go to court to ask the judge to allow the estate to pay her some money for daily living expenses. This was a huge embarrassment for her. Trust advocates went on to say that one way this headache could have been avoided would have been by using a trust instead of a will.
When you leave an inheritance that is accompanied by instructions, it is typically done in the form of a trust – in this case, an “incentive trust.” The key difference between an incentive trust and other types of trusts is that rather than provide for outright distributions, the trust assets are used to encourage or discourage certain types of behavior in your beneficiaries.
Those who preferred wills would then tell the story of Bill and Mary who created revocable living trusts. However, when Bill and Mary passed away unexpectedly in a car accident, the beneficiaries learned that although the trusts were created, no assets had ever been transferred to the trusts, so the trusts controlled nothing, and were worthless.
A will is a document that tells the world where you want your assets to go when you die. It is effective only upon death. Your will only controls property you own in your own name on the date of death. It does not control property titled in joint tenancy or property that you leave through beneficiary designations such as retirement plans and life insurance unless the named beneficiary is your estate.
The disadvantage with a will is that even though it states where you want certain assets to go upon death, those assets remain titled in your name. As a result, when you die, your loved ones cannot just step in and start handling those assets. They must probate the will – the process of transferring the assets to the beneficiaries named in the will. As with anything that happens in court, the process is time-consuming, usually requires an attorney, costs money, and is part of the public record.
In addition, because a will only becomes effective upon death, it does not address what happens in the event you become mentally incapacitated and can no longer handle your financial affairs. With a will-based estate plan, attorneys typically add a Durable Power of Attorney. This is when one or more persons are designated as your agent to manage your affairs. If there is no Durable Power of Attorney, or in the event the Power of Attorney is not accepted by one or more financial institutions, your agents might still end up in court to be appointed as your guardian or conservator. If approved by the court, the guardian and/or conservator will be granted specific powers to administer your assets and handle your daily personal needs.
A trust is a legal contract in which property is held by one or more trustees (typically you and/or your spouse) for the benefit of one or more beneficiaries. The revocable living trust acts as a will substitute and contains instructions for managing your assets during your life and also upon death. A living trust is created during your lifetime and becomes effective immediately when you sign it. Because a trust often contains specific instructions to cover a variety of life events, it tends to require more counseling time with your attorney and may be more complex than a will. It often costs more as well.
An advantage to trust planning is that you can transfer property to the trust, and still maintain control and use of that property while living. You can also revoke or change the trust at any time. You can be the trustee of your trust while living, and because these transfers are made ahead of time, upon your mental incapacity or death, your successor trustees can step into your shoes and start handling your financial affairs without a court order or the need to establish a conservatorship. Less court involvement saves time, money, and frustration; and it keeps the details of your estate plan out of the public record.
Just like the will, trusts have disadvantages as well. A trust must be fully “funded” to be effective. That is, the title to your assets must be changed from your own name to ownership by the trustees of the trust. In some cases, beneficiary designations are also changed from individuals to the trust. And that funding must be kept current throughout your lifetime as you buy and sell new assets. An unfunded trust controls nothing at your death and is therefore ineffective.
If you use trust planning, your attorney will typically also provide a “pour over” will to accompany the trust. This is a document that will take the assets that didn’t make it into your trust during life, and transfer them to the trust upon your death so that the instructions in the trust can be followed. Of course, like any will, the pour-over will must be probated.
Even a fully funded trust needs to be administered upon your death. Although you avoid the probate process, trust administration still takes time and money and may require the services of an attorney.
The bottom line about wills and trusts is that they are both merely legal documents used to accomplish your goals for your estate. The importance is not in the documents but in the planning itself. Every family is unique, and every estate plan is unique. Therefore, a “cookie-cutter” trust is no better than a “cookie-cutter” will, or vice versa.
Estate planning is counseling. Work with an estate planning attorney who listens carefully to your hopes, dreams, and goals for yourself while you’re alive; and for your loved ones after you’re gone. Ensure that you are able to leave specific instructions for what should happen to you and your loved ones during your lifetime if you’re disabled, as well as instructions for what happens after you’re gone. Consider available protections for subsequent generations, and ask about the impact of taxes on your plans.
Once you’ve had the chance for a full discussion on these important matters, your attorney can guide you to the best way to make sure your instructions are followed. And quite often it will involve a number of documents to make it happen – not just a will, and not just a trust!
Alan G. Orlowsky, President of Orlowsky & Wilson, Ltd. in Lincolnshire, Illinois, has been counseling people on estate planning for over 30 years. He previously worked for the IRS in its Estate and Gift Tax Division. He also worked for the Deloitte & Touche accounting firm, and he has taught taxation and accounting at Loyola University of Chicago, School of Business.
Al is a contributing author of the book 21st Century Wealth (Esperti Peterson Institute, Denver, 2000), and has written numerous articles on the subject of estate planning. Contact Alan Orlowsky by email or call 847-325-5559.