By Mark T. Coulter, Esquire
Estate Planning Attorney

Clients are frequently unsure if they want to plan their affairs using a Will or a Living Trust. Some people push for one type, and others push a different solution. To be honest, there is seldom one ‘right’ answer, and instead any decision requires balancing between a number of competing factors in order to select what is best for you and your family. The question is a highly individual one, depending upon what factors are most important to you. Here are some of the important decisional factors, though in the end, our best suggestion is to talk with us and let us work with you to decide what is best for you.

ISSUE ONE: PROBATE AVOIDANCE

One of the main reasons people select a Living Trust for their estate plan is to avoid having the majority of their estate proceed through Probate. The court supervised Probate proceedings under a Will can involve more delay, fees, and costs than under a Trust. Probate proceedings are also public records, such that information regarding the dispositive scheme of the will, the beneficiaries, and the nature of their inheritances are all public record. With a Living Trust, the public aspects are largely removed, except to the extent that certain documents, such as a Deed, may be publicly recorded if real estate is passed to a beneficiary.

ISSUE TWO: AVOIDING FEDERAL ESTATE TAXES

With a tax rate of 45% in most cases where estate taxes are due, avoiding such obligations is an understandable priority for many people. Oftentimes, the avoidance of such taxes is one of the primary sales points for anyone selling Living Trusts. In trust, however, the typical Living Trust arrangement is no better than a Will for these purposes. Most Living Trusts are ‘revocable’ trusts, to permit the person establishing the trust (the Settlor) to retain control over the assets in the event that they change their mind, or their needs change. As a revocable trust, however, the assets therein are considered every bit a part of the Settlor’s estate when they die, just as the probate estate under a Will would be. Moreover, either a Will or a Living Trust can be crafted to take advantage of the ‘credit shelter’ concept, effectively utilizing the Unified Credit available for estate tax purposes to completely shelter a large amount of an estate ($3,500,000 in 2009) from taxes upon the death of a person, and another equal amount upon the death of a spouse, if applicable.

ISSUE THREE: MINIMIZING HARDSHIP ON SURVIVING FAMILY

The death of a family member can throw the surviving members into an emotional tailspin, which is only aggravated by the burdens of administering a decedent’s estate through probate. Figuring out what to do, finding asset information, handling dispositions and title transfers can all seem a bit much in the midst of that chaos. A Living Trust can help in these situations for some families, because instead of an Executor having to identify, assemble and manage the assets until a court approved distribution is made, a Trustee can simply transfer title if necessary from the trust to the pre-designated trust beneficiaries. Moreover, if assets are going to be placed ‘in trust’ for some or all beneficiaries, then their presence in the trust makes it far easier, as the trust itself doesn’t need to change at all, and instead simply the beneficiaries thereof will be altered as described in the initial Trust Agreement. Nevertheless, the largest portion of the estate burdens under a Will can still be addressed by other means, if in planning your estate you take the time to prepare a comprehensive asset inventory. Such a document will assemble the necessary information for your executor regarding the nature, identity, location, size, and other useful information regarding your assets and family. We can make available a Confidential Asset Inventory for our clients.

ISSUE FOUR: START UP COSTS AND INCONVENIENCE

In most instances, the expense and inconvenience of creating a well thought out Will is far less than that of a Living Trust with similar goals. The main reason for this is that many of the steps required for a Trust need to be performed presently, whereas a Will permits them to be deferred until after death. For example, title to trust assets may have to be legally transferred to the trust now in order to fund it, and trustee expenses may begin as soon as a Trust is established. More legal fees are typically required up-front to create a Living Trust, because more work is involved. Further, after a Living Trust is established and funded, you need to remain vigilant to assure that it continues to be handled properly, and assets put into the Trust on an ongoing basis as needed, to reach your planning goals. In the meantime, because the assets are in the name of the Trust, you will experience some, usually minor, inconvenience as you handle your assets as Trustee of the Living Trust, rather than simply as owner.

ISSUE FIVE: AFTER DEATH COSTS

In exchange for the higher start-up costs with a Living Trust, they usually enjoy relatively lower costs to an estate after the death of the trust creator (Settlor) as compared to those under a Will. In essence, it is a question of whether you want to do the work, and incur the expense, now during your lifetime, or have your estate and executor handle it after you are gone.

ISSUE SIX: REAL ESTATE OUTSIDE OF YOUR STATE

If you own real estate in any state outside of the state of your domicile (where you live usually), then probate of a Will usually requires that you open a separate probate proceeding (called an ancillary estate) in any state where you hold title to real estate in order to give an executor power to transfer title to your beneficiaries. This can lead to expense and delay for your beneficiaries. For this reason, such real estate holdings may best be titled to a Living Trust, wherein the Trustee can have the authority to transfer title to property held in any state, without the need for another proceeding.

ISSUE SEVEN: YOU DON’T HAVE A STABLE DOMICILE

For people who have abandoned the traditional notions of a ‘home’ in favor of a life of travel and adventure, it may be difficult to determine where ‘home’, or their legal domicile, is really located. A Will must be probated in the state where your domicile is located in most instances, and the Will must be valid under the laws of that state. Thus, if you execute a valid will in one state, but move to another where the way the Will was signed or prepared is not adequate, then you could be deemed Intestate in that state, and thus have your asset distributed under the laws of intestacy, rather than under your Will’s plan. A Trust, however, usually need only be valid in the state where it was created, and it thereafter is given full credit in any other state for the purpose of handling your affairs. Thus, if you have, or may, embrace the vagabond lifestyle, or even just move frequently, then a Living Trust may benefit you more on this point.

ISSUE EIGHT: TAX RETURNS

Paperwork follows everyone everywhere, and taxes are certainly no exception. Under a Living Trust, if the Trustee is not the Settlor, then a separate tax return for the trust must be filed each year to account for undistributed income, and potentially pay taxes thereon. A federal EIN number for the trust will be required for tax filing purposes. Alternatively, for property held by your executor in a probate proceeding, your executor may have to file an Estate Income Tax Return if the estate generates income over $600.

ISSUE NINE: THE BURDEN OF DELAY

One of the main reasons some people select a Living Trust is to minimize the delay of administering their estate following death. Assets under a Living Trust can be transferred directly from the Trustee to designated beneficiaries, or simply maintained in the Trust for the benefit of the beneficiaries if the Trust Agreement so provides. Under a Will, however, assets must usually pass through probate, including a period of delay while creditors are legally notified, and delay caused by a crowed court schedule, executor inexperience, or difficulty assembling or managing the estate assets.

ISSUE TEN: THE SECURITY OF SUPERVISION

Under either a Will or a Trust, your goals will many times not be reached until after the time of your death. Unfortunately, you are not available then to see if your goals and instructions are properly carried out. With a Will, the probate court will oversee that your assets are listed on your estate inventory, that they are properly accounted for on the estate accounting, and that creditors, taxes and dispositions to your beneficiaries are handled before the executor is discharged and the estate closed. This supervision is largely absent from the administration of a Trust, and instead it is up to the beneficiaries to see that the Trustee is acting in a proper fashion, assuming that the beneficiaries have the necessary information about your Trust and their rights thereunder in order to raise any grievances.

What is the best solution, a Living Trust or a Will? The answer will depend in every case upon an examination of your own assets, goals and personal situation, balancing the factors described above with others applicable to your estate planning needs.

About Our Law Office

At the Estate Planning Centers at Coulter & May, P.C., we devote our practice to estate planning and assisting families through such transition times with estate and trust administration counseling. We offer guidance and advice to our clients in every area of estate planning, and offer comprehensive and personalized estate planning consultations. For more information or to attend an upcoming seminar or to book a consultation directly, please contact us at (412) 253-7526 or visit us online at www.estateplanningcenters.com.

Disclaimer: The information presented in this article is a conversational summary of a complex area of law and should not be construed to constitute legal advice. No person should rely upon the content of this article for making any decisions, and should instead consult with appropriate legal and tax professionals.