What should you use as the primary vehicle of your estate plan, a will or trust? This is a simple question that does not have a simple answer. Whether someone ought to use a will or trust depends on a variety of factors. In this post, I will discuss some of the major deciding factors that may push people in one direction or the other.
Let’s tackle cost first. The general principle is that a trust usually costs more at the outset and during the grantor’s (person establishing the trust) lifetime compared to a will, but a will faces more costs after the grantor’s passing. This general principle is not always the case. Sometimes a complex trust that calls for distributions to be made to various beneficiaries over time will require far more administrative costs than, for example, a will that called for an immediate distribution to a few family members. Comparing apples to apples, however, a will of similar complexity will face additional costs such as probate tax, (not the same as estate tax), surety on the executor’s bond, commissioner of accounts fees, mandatory accounting costs, attorney’s fees, etc. Costs for final income tax filing, asset management up to the point of distribution, and the like will generally be about the same whether one uses a trust or a will, although a trustee might face less hassle than an executor in some circumstances.
If cost were the sole factor, it would come down roughly to whether someone prefers to pay more now (trust) or have their estate pay more later (will).
The typical will is generally far simpler to set up than a trust with the same terms. The trust is more complex because it is in some sense creating the laws that will bind it in the future. Furthermore, for the trust to be effective, it requires the grantor’s assets be re-titled in the trust’s name, which does take some initial effort and create some (relatively minor) administrative burdens during the grantor’s lifetime. This being said, a trust can be far simpler to administer upon the grantor’s passing compared to a will because it can be done without any court involvement. The successor trustee simply distributes the assets to the beneficiaries in the right amounts and perhaps provides them with an accounting, then the trust terminates. A will, however, must be submitted to probate, will generally require qualification of an executor, will require an inventory of the estate and accountings to be submitted to and approved by the commissioner of accounts, etc. These administrative hurdles cannot be bypassed except in the case of very small estates.
Again, the bottom line is whether someone wants to deal with a little more administrative headache now to make things simpler in the future (trust) or keep things simple now and let their executor deal with the court and commissioner of accounts later.
A will becomes part of the public record when it is submitted to probate. Qualification of an executor requires their appearance at the court to take an oath and pledge bond. In contrast, a trust is a private agreement that need not ever be publicized. Even financial institutions holding the assets are not entitled to the full text of the trust specifying the distributions, etc.
Here, then it comes down to whether privacy is a concern (trust) or not (will).
If parents have minor children and they wish to name legal guardians for them in the event of their untimely death, they will need to name such guardians in a will. But this fact alone does not mean that they should feel locked into using a will as the primary vehicle for their estate plan. In fact, practically every estate plan utilizing a trust also includes what is known as a pour-over will. The pour-over will is primarily used as a safety net for any assets that did not get put into the trust while the grantor was living. It simply pours these assets into the trust or into a testamentary trust with identical terms. But there’s no reason such a pour-over will cannot also be used to name legal guardians for any minor children.
So, yes, a will is required to name legal guardians for children, but trusts usually come with wills as it is, so really, it is not an issue.
Tax Issues, Special Needs, etc.
The typical trust used for estate planning is a living revocable trust that can be amended at any time by the grantor just as a will can be revoked or a codicil (amendment) added (as an aside, I do not advise ever using a codicil to amend a will unless your will is drafted by hand and we no longer have access to word processors or electricity).
But a trust can also be created by a will, which is known as a testamentary trust. These are often used as a long-term provision for minor children or young adults when it may not be prudent to leave a lump sum of money or real estate to them at age 16 or even 26. Such trusts can also be used to provide extra money to someone with special needs who may get the bulk of their care from a government program.
In other words, if distributions over time or in someone’s discretion is important, it may be possible to achieve these goals via an inter vivos trust such as a living revocable trust or via a testamentary trust created within a will. Particular circumstances will likely dictate which turns out to be better.
There are also tax issues, not least of all the federal estate tax, that might mandate the use of very particular kinds of trust to protect assets and limit tax exposure as much as possible. If the estate tax is a consideration, it is likely that an array of trusts of different kinds will be in your best interest. More on these kinds of trusts later.