LAW FIRM BLOG

Last Wills vs Living Trusts

February 26, 2020

There are basically two instruments that can transfer assets from your estate at death: a last will and testament and a revocable living trust. There are substantial differences between them, each with benefits and drawbacks that must be understood to make an informed decision as to which fits best to a particular situation.

What is a Last Will and Testament?
A last will and testament is a written document, signed by the testator, when of sound mind, that describes their estate and indicates who will inherit (and, sometimes, who will specifically not inherit) their property upon death. If a person has created multiple wills, then their “last” will shall be executed. What is in a will can vary widely, but the testator generally will include the following information:

•An executor, the person who implements the testator's wishes, inventories assets, manages their distribution, pays debts, and shepherds the estate through the probate process.

•Beneficiaries, the people, institutions, or charities chosen to inherit the property after death.

•Directions as to how property is to be distributed to beneficiaries after death.

•Guardians designated to act as custodians for children if they are minors, and a “property guardian” to oversee any assets left to them.

If you don’t have a complex estate, a will can suffice. Individuals can specify any disposition of their assets that they desire and can amend, alter, or revoke their will at any time.

A will is not expensive or difficult to create, but, after the death of the testator, it must go through a sometimes costly, often lengthy legal process called “probate” before the assets may be distributed. Probate is the legal process designed to conclude a person’s financial affairs. Fees your estate must pay to the executor, the attorney and to the court add to the expense. Once filed, wills become part of the public record, accessible to everyone. However, if you're skeptical that your assets shall be distributed according to your wishes, using a will provides court supervision to assure that the instructions of the will-maker are implemented.

Unfortunately, a will does not have any value for property management while the person who wrote it is alive. If they become incompetent, a court appoints a guardian to manage their assets. This process is usually burdensome and expensive, more so if there is any contest. In many cases, guardianship can be avoided when the incapacitated adult has a “durable” power of attorney, although there are some limitations on managing the estate of another through a power of attorney.

Many people live in a different location than where they created their will. The general rule is that if a will was valid when and where it was made, it remains valid even if the testator moves to a different state. However, any ambiguities, discrepancies or omissions are usually interpreted by the laws of the state of domicile, not the laws of the state where the will was made.

The original last will and any codicils must be produced after death. Copies are acceptable only in special circumstances.

What is a Revocable Living Trust?
A living trust is so named because it is created while the property owner (also known as the donor or settlor or grantor), is alive and becomes active as soon as it is signed. A revocable living trust, sometimes known as a “inter vivos trust,” is a legal arrangement, represented by a document called a "trust agreement" or "declaration of trust." The trust document names the trust, names the trustee (usually the grantor) and one or more successor trustees, gives the trustee powers, indicates trustee compensation, lists assets covered, and directs the operation of the trust for as long as it exists.

The trustee is either someone the trust maker appoints or the actual trust maker. That is, the person who sets up the trust, the grantor, can maintain control over the property allocated to the trust as long as they live. In most cases, the grantor retains the right to instruct the trustee to distribute all or any portion of the trust assets and income as the grantor desires, and the right to alter or revoke the trust at any time. The trustee and beneficiaries can change over time. Upon the grantor's death, an appointed successor trustee distributes property to beneficiaries according to the instructions in the trust agreement without probate.

A trust is complicated and costly to prepare and manage, but, after death, a trust does not have to go through the time-consuming, expensive probate process. The beneficiaries receive their gifts immediately, or according to the trust instructions. Trusts are private and do not generate a public record. But you cannot choose a personal guardian for your children or specify final arrangements in a trust.

Upon the grantor's passing, family and friends will not have to go through the hassle of probate to transfer title. Your successor trustee will instead embark on a journey without court supervision, called “Trust Administration.” This generally consists of:

(1) Giving notice to your beneficiaries that you have died.
(2) Updating title to real estate, bank accounts, cars, etc.
(3) Preparing tax forms and paying creditors.
(4) Distributing the assets to beneficiaries.

This process usually takes between four to six months, and distribution can be made prior to the closing of the trust in most instances. Unlike in probate, the cost is not set by law: the attorney gets paid for their hourly rate and the successor trustee is usually entitled to 1% of the assets for one year of work. This is significantly less than the probate fees.

The trust may specify the property to be transferred to it, but most trusts can and do accept any assets transferred to them. Assets can be added, removed, sold, or used without asking or notifying anyone, and without any tax consequences.

Trusts do require you to re-title your assets in the name of the trust while the grantor is alive, which takes time and money. If you don't re-title your assets, those assets won't pass through the trust and instead will go through probate.

Living trusts are time-consuming and expensive to establish, involve ongoing maintenance, and are trouble to modify. A lawyer-drafted trust will cost upwards of $2,000.

There is little state-to-state variation in trust law and its interpretations, so trusts are often transportable from state to state. In general, trusts are contractual, so that you can write in almost any terms and conditions you want (subject to certain legal limitations).

Absent legal disputes, the operation of a trust is usually outside of court jurisdiction. This can be of importance when one of the objectives is to assure privacy regarding estate value, or any other issue that you would not want to be public knowledge.

If you create a living trust, you have the added complication of managing it during your lifetime. When the grantor cannot manage the trust because of disability, the well-drafted living trust provides a mechanism that allows successor trustees to assume responsibility. Management of a trust as a successor trustee is generally much simpler than management through the use of a durable power of attorney and the costly and burdensome requirements of a court-ordered guardianship are avoided.

Comparing Wills and Trusts
A last will and testament and a revocable living trust are two different tools that accomplish similar goals, but there are important differences in how they function. Both are used to name beneficiaries and distribute the assets of a deceased person. While living trusts focus largely on the management of your assets during life and after death, wills focus more on the distribution of your assets after you’ve died. Usually one serves as the foundation of the estate plan with the majority of the property passing through it. Deciding which is better for you depends on how you value the advantages and disadvantages of each one.

Specifically, a will is a legal document, effective only after the death of the will owner, that states the manner in which a person’s assets are distributed among the legal heirs. In contrast, a trust is a legal arrangement in which the settlor authorizes a person as trustee to hold assets for the sake of the beneficiary, effective from the date it has been created for the benefit of another person or the settlor.

Wills are simpler and cheaper to create, but require more effort and expense later, while living trusts are more complex and costly to begin, but usually less work and expense afterward. Wills are back-loaded, with the heirs assuming the burdens, while living trusts are front-loaded, with the effort and expense at creation, leaving less burden on a surviving spouse, children, or other heirs later.

Beyond that, they are useful for different purposes. For example, most people use living trusts to avoid probate and conservatorships. But you can’t use a living trust to name an executor or guardian for your minor children. You need a will to do that. The will can also address matters that do not relate only to assets.

Consider these questions to determine whether a last will or living trust is better for you:

What type of property do you own? If you want to transfer real estate outside of probate, you will need to establish a living trust.

How big is your estate? If you have a fairly large estate, one that totals more than one million dollars, you may not qualify for simplified probate proceedings and the costs will likely be high.

Will your estate be subject to estate taxes? If your estate is valued at a certain amount, which varies from year to year, your estate will have to pay taxes to the federal and possibly your state governments. While the federal exemption limit is set at $11.58 million in 2020 and many people do not have to worry about this imposition of taxes, some individuals do. Placing your assets in a living trust does not protect your estate from paying taxes.

Will you actively manage your estate plan? If you cannot carefully manage it yourself, a living trust may not be your best choice. If you don’t have the time or the inclination to operate a trust, a will may make more sense.

Perhaps the best solution for complete estate planning and financial security, especially in the case of larger estates with multiple beneficiaries, is to utilize both a last will and a living trust. An individual or a couple can place their property and assets into a living trust and still maintain control over them while their beneficiaries enjoy the benefits of the trust immediately and are assured of their inheritance after the death of the grantor. The trust, however, can only affect property that is transferred to it. The will acts on any property that is not transferred to the trust. The will provides for the collection of that property, payment of probate expenses, and transfer of whatever is left to the trust. In effect, whatever is left in the probate estate "pours over" into the trust and is then administered according to its terms.

Even when your major assets are included in a trust, you will still need a supplementary “pour-over” will to transfer property remaining outside the trust.

The use of both a last will and a living trust can effectively ensure an individual’s wishes are implemented in the manner they desire. Combining these two documents assures the highest level of legal and financial protection for an individual’s estate.

Living Trusts and Wills, Compared

Name Beneficiaries
The main function of both wills and trusts is to name beneficiaries for your property. In a will, you simply describe the property and list who should get it. Using a trust, you must do that and also “transfer” the property into the trust.

Leave Property to Young Children
Except for items of little value, children under 18 years cannot legally own property. When you leave property to a minor, it must be managed by an adult--at least until the child turns 18. When leaving property to a minor using a living trust, the trustee manages the property until the child reaches an age determined by you. When leaving property to a minor using a will, you must name an adult to manage any property left to or earned by your children. If you do not, the court will appoint someone to do it after your death.

Revise your Document.
Both revocable living trusts and last wills allow you to revise your document when your circumstances or wishes change, so long as you retain the legal capacity. But you’ll probably find it simpler and easier to revoke your old will than to revoke a trust. A will usually costs less to change, too.

However, it is usually easier to make amendments to a revocable trust than to a will. A trust can be amended by a document signed only by the grantor. No witnesses or other formalities are necessary as with a will.

Probate
Property in a revocable living trust does not pass through probate. Property that passes using a will guarantees the probate process. Probate is required to determine the will’s validity, appoint a representative, inventory property, pay debts and expenses, identify heirs, and oversee property distribution. Some people falsely believe that if you create a will, you avoid probate. This is not correct. A will cannot distribute property without probate. Probate is public, costly, time-consuming, and can be tedious. It is not uncommon for the process to take years to be resolved. And for most estates, it isn’t necessary.

The benefit of the avoidance of probate may vary. For example, it may be significant if you own real estate in more than one state, because you avoid multiple separate probate proceedings each according to the laws in that state. This is expensive due to multiple attorney and court fees.

Because property passing through a living trust does not go through probate, it can be distributed immediately to beneficiaries after the death of the grantor, without any fees or interference (or guidance) from the court. Most presume that court supervision is inherently bad. But a benefit is that there is an impartial judge overseeing the administrator, so it’s difficult for him or her to misuse your assets. The same cannot be said of your successor trustee, a fiduciary bound by the provisions of the trust, who could take advantage of their position and dissipate the assets. Obviously, this risk can be mitigated by carefully choosing your successor trustee. In some cases, the best choice may be to select a professional fiduciary.

But not everyone needs to avoid probate. If you don’t own much property, or if you have many debts, creating a trust may exceed the savings of avoiding probate.

Privacy
After death, a probated will becomes a public document filed in court and available to anyone. The names of representatives, beneficiaries, and asset values are not private. A revocable living trust is a private instrument, not filed in court, and its terms are not available to the public.

A living trust cannot guarantee complete privacy, although it is much more private than a will. Some financial institutions, for example, may request to see copies of the trust agreement before complying with its terms.

Transfer of Property
After a living trust is drafted, signed, and notarized, you must transfer the property into the trust for it to be effective and avoid probate. For many items, this is as easy as making a list of the property and attaching it to the trust document. The fact that the trust mentions certain specific assets, however, doesn’t mean that they are in the trust. You actively need to change title to those assets. That means deeds to real estate must be reissued from the grantor to the trust’s name. Titles to vehicles have to be reissued. Names on stock, bank accounts, and other assets that are registered in individual or joint names must be re-registered in the name of the trust. Insurance policies and other assets payable on death should be changed so that the trust is beneficiary. This is not usually complicated or particularly difficult, but it is an extra step that you must take. In contrast, no funding or transfer of property is required when using a will.

Assets not funded into the trust or lacking beneficiary designations are not considered part of the trust and pass by will or the laws of intestacy. The assets will be added to your trust after you die through probate before it can be distributed along with your other property according to your revocable living trust. This may be cumbersome and may involve costs such as filing fees.

Court Challenges
A will is more likely to be challenged than a trust. Sometimes dissatisfied heirs may contest a will, which typically results in a long and costly court battle. While a living trust may be challenged, it’s generally considered more difficult to successfully contest a living trust than a will because the grantor not only signed the document but acted on it. Attacking a trust is also harder than attacking a will because trust provisions are not made public. Because probate is a public process, disgruntled heirs and other interested parties are invited to submit claims and contest your will. Trust records will go public only if any parties file a lawsuit to challenge the trust.

Conservatorship
If you are serving as your own trustee, the trust instrument will usually provide for a successor trustee upon your incapacity. A living trust thus avoids the need for a court-appointed guardian as it contains a prearranged mechanism that will ensure the continued management of your assets, and direct how assets are used for support and treatment should you become disabled or incapacitated. Because a will is only effective upon death, provisions of a will cannot avoid conservatorship proceedings during your life, therefore, a guardian will be needed if you are incapacitated.

Most people prefer to have their care and assets managed privately by people they know and trust, instead of being placed in a court guardianship, which is costly, time-consuming, public, and potentially stressful.

While continuity of management is also possible using a will and a durable power of attorney, third parties such as banks and brokers often have more difficulty acting on a power of attorney than with a trust agreement. And, if the designated attorney-in-fact is unable to act, the power of attorney may not be usable.

Guardians for Children
In a last will, you can name guardians to care for minor children. You cannot do this in a living trust.

Additionally, if you have minor children, they cannot hold title to property. While a guardian cannot be named for a minor child through a provision of a trust, a trustee, however, can manage assets held by the trust for a minor beneficiary. In a will, you name someone to manage property left to or earned by your children. You cannot do this in a living trust. A will that sets up a testamentary trust for a child, requiring a trustee until the child reaches a specified age, is subject to the jurisdiction of the probate court. Whereas, if a living trust is set up leaving assets on death to a minor child, in trust, such a trust administration is outside the purview and expense of the probate courts.

Naming an Executor
Wills allow you to name an executor who will conclude your estate after you die. That person will be responsible for interacting with the probate court, protecting assets, paying debts, and distributing what property remains to beneficiaries. You can’t name an executor in a living trust. Instead, you name a successor trustee who will manage the property left through the trust. Because most estates will need an executor to some extent, it makes sense to make a will and name an executor, even when you leave most of your property through a trust. In most cases, it is efficient to select the same person for both jobs.

Taxes and Debts
In your will, you can leave instructions about how you want debts and taxes to be paid. For example, you can indicate that you want a loan to be paid from your savings account. You can also use your will to forgive debts owed to you. You should not do these things with a living trust.

Ease of Creating the Document
Wills are simple written documents that require no special language. Although those created by attorneys may be more complex and nuanced, wills need only be signed by the will-maker and witnessed by two people. In some states, not New York, even handwritten wills are acceptable. Living trusts tend to be longer and more complex, however, because the trust document must cover the trustee’s duties, and set out all of the specifics that are simply assumed in wills.

Cost
A will is less expensive to have prepared than a trust and you may even be able to write one without an attorney. A trust requires legal assistance. It may cost several thousand dollars to create one and thousands more to maintain and manage the trust.

While some individuals believe that they do not need a will if they have a trust, this is usually not the case. If there are any assets left in the individual’s name at the time of his or her death that are not part of the trust, this residue will be disposed of in accordance with state laws of intestacy if there is no will. Therefore, there is often a cost to establish a trust and to create a pour-over will that deposits any remaining assets into the trust at the testator’s death.

Additionally, administering the trust may also add expenses. Many trusts are administered by financial institutions. Even if a private party is named as the trustee, he or she may be compensated at a reasonable rate for his or her time and efforts. Additionally, more costs may be incurred when the trustee has to re-title documents to transfer property ownership to the trust.

However, these expenses should be compared to the expenses associated with probate and paying the executor of the estate, fees which often equal a significant share of the estate.

Estate Taxes
Neither wills nor revocable living trusts help reduce estate taxes. Despite popular belief, living trusts do not provide any particular tax advantages. Revocable trusts do not save income taxes, nor do they save estate taxes. In fact, during a grantor’s lifetime, the IRS may actually discriminate against revocable trusts in certain specific income tax situations.

Changed Circumstances
In many states, wills change automatically by statute upon divorce, marriage, or the birth of a child. Most jurisdictions do not provide similar flexibility for revocable trusts. Consequently, when circumstances change, the grantor must be vigilant and make the necessary amendments to the provisions of a revocable trust.

Final Wishes
It is permissible to leave funeral instructions and other final wishes in your will or living trust estate plan.

Lost or Destroyed Originals
When offering a will for probate, all original wills must be provided to avoid a presumption that the will was revoked. Typically only one original must be produced at death. Since revocable trusts are not probated, multiple originals may be signed and any copy may validate property held in the trust at death. Having a revocable trust, therefore, may simplify the transfer of property at death if the original documents cannot be located or have been destroyed.

Creditors
Creditors can reach the assets in a revocable living trust during the grantor’s lifetime.

Administrative Costs
Both a will’s executor and the trustee of a revocable trust are entitled to receive commissions. Because the trust is often administered for many years before being distributed, it is likely that the trustee’s annual commissions, even if calculated at a lower rate, will in aggregate, be higher than the executor's.