Living Trust as Alternative to a Will: What a Living Trust Is and Is Not

A living trust (also known as a "revocable trust" or "inter vivos trust") can be an alternative to a will. Like a will, a living trust may direct the distribution of your property upon your death. And, like a will, a living trust may be altered, or revoked, at any time prior to your death. Unlike a will, however, a living trust also provides for the management of your property, either by you or by anyone else you choose, during your lifetime. Although you create a living trust, you retain complete control over your property because you can revoke or change the trust at any time. (An irrevocable trust, on the other hand, is a permanent, unchangeable arrangement.) Note: The same tax planning devices are available whether you use a will or a living trust and thus the choice between a living trust and a will should not be made on the basis of tax considerations.

Background

The traditional method of transferring title at death ("probate") is through court approval of a will and court-directed distribution of property as required by the will. However, not all property changes hands at death through a will and the probate process: Insurance, individual retirement accounts, pension plans and other employee benefits may pass to living persons by virtue of beneficiary designations--not by will and probate. Likewise, property held in joint tenancy passes to the surviving joint tenant without the need for probate. Property may also pass to a surviving spouse through an expedited, simplified court procedure without probate formalities. Probate may also be avoided by transferring property to a living trust which directs the transfer of property upon death.

Glossary

A living trust is created during life ("inter vivos") when you (the "trustor," "grantor" or "settlor") sign a "living trust" declaration or agreement which names one or more "trustees" to manage the trust. You can name anyone, including yourself or an institution, to be a trustee or cotrustee and you can select a successor trustee to act if the initial trustee dies, resigns or becomes physically or mentally incapacitated. Property must be transferred into the trust during your lifetime to provide for its management by the trustee during your lifetime and to escape probate. After the trust has been established, all transactions involving trust property are conducted in the name of the trustee.

A simple will is also needed to "pour over" to the trust any property which is not transferred to the trust during life. Upon your death, the trust property (including property added to the trust by the will) passes to individuals or charity, either outright or in trust, as directed by the terms of your living trust.

What to Consider When Choosing Between a Will and a Living Trust

Continuity of Management at Death

A living trust provides for the continuing management of property upon the death or disability of the trustor and generally allows property to be more quickly distributed upon the trustor's death. This is because a successor trustee can act almost immediately without the necessity of notice or court approval. With a probate estate, several weeks may pass before court appointment of an executor who is authorized to deal with income and expenses of the estate.

Avoidance of Conservatorship

A living trust also protects against nonmanagement or mismanagement of assets during physical or mental incapacity. If you become incompetent, a successor trustee can take over management of the trust without a court proceeding and without interruption. A "durable power of attorney" may also be used to avoid a court proceeding for incompetency, but does not have the flexibility of a living trust for this purpose.

Avoidance of Probate

A living trust to avoid probate usually reduces attorneys' fees, although it is impossible to estimate accurately the savings to your heirs. Probate attorneys' fees are based on a statutory fee schedule and amount to roughly two percent on the first $1 million and one percent on the next $9 million. These fees are based only on the value of assets passing through probate (not on insurance, employee benefits, joint tenancy assets and a surviving spouse's interest in community property). However, even if all of your assets have been placed in a living trust and probate is completely avoided, an attorney and an accountant are usually required to assist with distribution of the trust assets upon death and to prepare death tax returns. They are usually paid by the hour and the cost of such services will depend on the billing rate and the number of hours expended. (Attorneys' and accountants' fees incurred after death are generally tax deductible, whether or not probate is avoided, so the actual savings to your heirs through use of a trust should be calculated on an after- tax basis.)

A cost comparison of trustee and executor fees must also consider whether family members are appointed to act in these capacities. If a bank is appointed as trustee or executor, the comparison becomes more complex since a bank acting as trustee may charge a fee not only after death but also before death if it acts at both times. Further, a bank's trustee fees are usually charged on an annual basis vis-a-vis an executor's fee, which is only charged once. Trustee fees are normally paid each quarter; executor fees in probate are normally paid when the probate is concluded.

Since probate involves notices, court supervision and review, and waiting periods, more time is required to distribute assets from a probate estate than from a living trust. Probate laws have changed significantly in the last few years, however, and the trend has been to remove from the court process much of the routine administration of an estate. Also, the main reason for delay in the distribution of assets after death involves the filing of the death tax returns and payment of death taxes--not the probate process. The timetable for calculating and paying death taxes is not affected by whether you use a will or a living trust.

Probate records are open to the public; a living trust is not. This is usually not an important factor to consider in choosing a trust or a will unless the estate plan or the decedent is newsworthy.

There are other alternatives to probate, including summary proceedings for small estates (less than $100,000 in assets) and for property passing outright to the surviving spouse. These alternatives are generally inexpensive and efficient and therefore should be considered in appropriate circumstances.

Cost and Complexity of a Living Trust

Using a living trust to carry out your estate plan requires many changes during your lifetime: stocks must be re-registered, trust accounts must be established and title to promissory notes, real estate, partnership interests, mineral interests and all other assets for which you wish to avoid probate must be transferred into the name of the trustee of the trust. Decisions must be made as to which assets are community property and which are separate property (where applicable). This process is called "funding the trust" and requires some time, effort and expense. After funding is completed, it should only be occasionally necessary to consult an attorney with respect to operation of the trust. The cost of operating a living trust during life will exceed the lifetime cost of using a will, but the cost and nuisance should be relatively minor. (No change in lifetime management is involved with a will since it does not become effective until death). In our experience, the average cost of an estate plan using a will is about one-half that of a similar plan using a living trust. Transfers of assets into the trust, questions regarding trustee authority and powers and the difficulty of amending a trust as compared to a will may contribute to the increased lifetime costs of a living trust. These lifetime costs will hopefully be balanced by a savings in fees at death.

Summary

Whether to use a will or a living trust (with a "pour-over" will) to implement your estate plan is not a simple choice. The decision should be made in light of your assets and your estate plan. Out-of-state property, the possibility of a contest after death, the size of your probate estate, the complexity of your business affairs, your situation with creditors or potential creditors and other factors unique to you must be considered in making your choice. In effect, the living trust causes you to do now some of the things which might otherwise await the probate process at your death. This can give you the satisfaction of knowing you are beginning to "put your house in order" or it can be an unnecessary nuisance.

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