Wills or Revocable Trusts: Which is Right for You?
Whether you are creating an estate plan for the first time, or considering making changes to an existing plan, it is important to understand your options. In this article, we will discuss two common planning mechanisms for Montana individuals and families whose estates are not subject to the Federal estate tax. As with most areas of the law, each state has its own trust and probate codes, as well as tax considerations, and each individual’s and family’s circumstances are unique. For these reasons, this overview is offered for general informational purposes only and readers should should consult with attorneys and tax professionals in their states to choose a plan that is best suited to meet their specific needs.
For most people, there are two basic options: a will or a revocable trust. Each will provide instructions to ensure that your assets are distributed according to your wishes at your death, and a comprehensive plan, regardless of whether you choose a will or a trust, should also include all the documentation you’ll need to ensure that the right people are identified in advance to make decisions for you during your lifetime when you are not able to do so. While these plans share many similarities, there are also some key differences that are important to understand. Before we get into the specifics of each plan, it is helpful to understand what steps your family will need to take after your passing to legally transfer your assets as you instruct in your estate plan. This process is called probate (in the case of a will) or trust/estate administration (in the case of a trust).
Probate and Trust Administration
The steps your loved ones will need to take after your passing will depend on whether you have a will or a trust. If you have a will, your Personal Representative will take the following basic steps:
file your will with the Court and obtain legal authority to pay your bills and distribute your property;
notify your heirs and creditors of your death and pay your final expenses and debts of your estate;
inventory and account for your assets and obtain values for each; and
distribute your property as instructed in your will.
If you have a trust, your Trustee will take the following basic steps:
if any asset that should have been held by the trust was not properly transferred to the trust during your lifetime, your Personal Representative (this is usually the same person as your Trustee) will open a probate for the purpose of transferring that asset into the trust to be distributed according to the trust’s terms (this step is only necessary if you forgot to transfer an asset that doesn’t transfer to someone else by operation of law or beneficiary designations into the trust during your lifetime);
account for and value all trust assets;
pay your final expenses and debts of the trust as they become due; and
distribute the trust assets according to the instructions in the trust.
The steps above are a very broad overview of the general processes and there may be signficantly more requirements depending on the unique facts and circumstances of each case. In any event, the primary difference between probate and trust administration is generally the need for a court proceeding: will-based estate plans will be filed publicly with the Court and will follow a statutorily-dictated timeline, while properly funded trust-based plans are administered privately without the need for a court proceeding and not subject to the same timelines. While there is nothing inherently bad about a court proceeding, some people prefer a trust-based plan because of the privacy it affords.
Now that we have a general understanding of the probate and trust administration process, we can get into the similarities and differences between wills and trusts.
Wills
Generally, wills are documents that identify the individual(s) who will be responsible for paying the expenses of your estate and distributing your assets according to your instructions. It will also contain your instructions for distribution of your assets. Wills can be and often are very simple, but some situations require more nuanced planning. Wills can also provide more detailed instructions as needed (and can even include instructions for the creation of a trust after your death if certain criteria exist).
Wills do not have any effect until your death and may be changed as frequently as you wish. In fact, you should review your will from time to time and consider whether changes may be necessary. Reasons to change your will may include, but certainly are not limited to, divorce, your child reaching adulthood, changing relationships with the people you have identified in your will, etc.
Because wills only take effect at your death, they do not give anyone the right to make decisions for you during your lifetime when you are not able to do so yourself. For this reason, it is important to make sure you have a durable power of attorney and a health care power of attorney and living will in place. These documents will give trusted individuals the right to manage your money and property, and make medical decisions for you, when you cannot do so. Without these documents in place, your loved ones may be required to go through a legal proceeding through which the Court will appoint someone to act in those roles for you. This is costly, time-consuming, and can be invasive.
Revocable Trusts
A revocable trust is a legal arrangement by which you transfer ownership of your property to be managed by a trustee. Unlike a will, a trust does have a legal function during your lifetime: it owns your property for you. Once your trust is created through the estate planning process, you will “fund” it by transferring ownership of most of your assets into the trust (certain assets are best kept outside of the trust, but your attorney and financial advisor will help you determine which assets to transfer and which to keep out of the trust). When trusts are created for estate planning purposes, the trust agreement will contain instructions for the distribution of the trust property at your death. By transferring these assets into the trust, you remove them from your personal ownership and, as long as this is done correctly, you will avoid the need for probate. For this reason, these trusts are sometimes referred to as “probate avoidance” trusts.
Because your assets will be held by the trust and not by you personally, you will appoint a “trustee” within your trust document. You may choose to be your own Trustee for as long as you are able and choose a couple of trusted individuals to step in as successors when you are not able to act for yourself anymore. This helps avoid the need for a guardianship proceeding. The Trustee, whether it is you or a third party, will be responsible for managing your assets for your benefit on a day-to-day basis during your lifetime and for distributing them according to your instructions at your death.
Like wills, the instructions within your trust can range from very simple to very complex. There are options for just about any scenario, and some options will be very easy for your named successor Trustee to administer, while others may require the assistance of a professional.
While the Trustee will be responsible for management of all assets owned by the trust, including any money held in checking or savings accounts titled in the name of the trust, he or she will not have the authority to manage any assets not held by the trust, and further, will not have the authority to make medical decisions for you. For this reason, it is important to have durable and health care powers of attorney and a living will in place as well. In addition to these documents, you should have what is known as a “pour over” will, the purpose of which is simply to instruct that, if an asset was not successfully transferred to the trust during your lifetime, it should be transferred into the trust via probate in order to be administered as part of the trust estate.
So: Which is Right for You?
As with most things, it depends! In order to make sure you understand the process and pros and cons associated with each type of estate plan, you should discuss your specific circumstances with a qualified estate planning attorney in your state. Your attorney (often in conjunction with your financial and/or tax advisor) will consider things like the total value of your estate, the nature of the assets comprising your estate, family dynamics, age(s) of your children, and tax implications before recommending a specific plan. By taking all of these factors into consideration, you’ll have peace of mind knowing that you’ve done all you can to plan for your care during your lifetime and also to take care of your loved ones after your passing.
If you are a Montana resident and ready to begin the estate planning process, please reach out to us.