I Have a Will? Or a Trust?
To evaluate the pluses and minuses of
wills and trusts, it is helpful to understand three important
principles of law: (1) probate, (2) the minimum value of a taxable
estate, and (3) the manner in which assets are titled or owned.
Probate (a legal proceeding for the
administration of the decedent's estate) is required when a person
dies owning more than $75,000 in gross personal property or $100,000 in net real property
in his name alone. (These amounts reflect Arizona legislation passed in 2013.) Though the probate
process is no picnic, it generally is not as unpleasant or as
expensive as some of the probate horror stories might indicate.
There is no estate tax upon death
unless the decedent's estate exceeds $5.34 million (for 2014).
The manner in which assets are titled
at the time of a person's death is extremely important and prevails
even over the terms of a will or trust. A joint owner of an account
will receive the funds of and account even if a person's will or
trust provides for the funds to go to someone else. Thus, it is
extremely important that a person title his or her assets
appropriately, usually just in the decedent's name.
Advantages of a Will
advantages of having a simple will are that a will works just fine
when properly prepared and when the decedent's assets are titled
just in the decedent's name. Also, a will is, relatively speaking,
quite inexpensive. The well-known disadvantage of a will is that
probate is required after the decedent's death. The probate is a
moderately involved process of administering the decedent's assets
by the appointed Personal Representative (known in some other states
as "Executor"). It does take at least several months for completion,
and it subjects the estate to attorney's fees and court costs.
However, probate imposes no additional tax on an estate.
Advantages of a Trust
stated, the advantages of a trust are (a) the avoidance of probate,
(b) the opportunity for increased professionalism in the
administration of assets, and (c) a tax advantage for married couple
with estates over $5.34 million. The disadvantage is the cost of
establishing a trust, which is substantially more than creating a
In short, a will works fine and is not
expensive to create, but the expenses and delays of probate can be a
negative factor. A trust, on the other hand, also works just fine
and avoids the delays and expense of probate after death, but the
trust is more expensive to create in the first place. Some people
might say you can pay the legal expenses resulting from the
administration of your estate now, by creating a trust, or your
family can pay later, if you execute a will while knowing that your
estate will have to pass through the probate court upon your death.
Therefore, to the
question, "Should I have a will or a trust?" the answer is: "It
depends – on several factors." Those factors include:
the value and nature of your assets;
your desire (or lack thereof) to
bear the expense now of setting up your estate plan;
the ability or inability of your
selected personal representative to handle a court proceeding upon
your death; and
your tolerance for the few
entanglements of living your life with your trust during your
Tax Advantages of a Trust for Married
To illustrate the tax advantage of having a
trust, let's first analyze the tax ramifications of death for a
couple without a trust.
We will assume that Husband and Wife
have been married for many years and have one or more children who
will inherit all of the couple's $8 million estate. Let's also
assume that all of the assets are owned in joint tenancy by the
couple, or that the Husband and Wife have named each other as
beneficiary on all life insurance policies, IRAs, 401(k)s, etc.
In this example, Husband dies first.
His share of all of the assets passes automatically to Wife because
of the manner in which the assets are owned, such as joint tenancy.
Also, there is no tax to Wife, for two reasons:
First, Husband's share of the $8
million estate is $4 million, because Wife already owned half of
Second, Wife receives from the IRS
an "unlimited marital deduction" upon Husband's death, which
prevents any tax at that time.
Thus, when the first spouse dies,
there is no probate requirement because all assets were owned
jointly, and there is no estate tax due.
However, now that Wife owns the
entire $8 million estate, probate will be required after her death, and only
$5.34 million of her $8 million estate is exempt from estate taxation. That
million will pass untaxed to her chosen heirs, under the terms of her will, but
the remaining $2.66 million will be taxed
at roughly 50%.
If this couple had created a trust
with tax planning provisions, there would be no probate and no
taxes. For these reasons, a trust has great benefits for couples
with large estates.
The decision about
going with a will or a trust can be complicated, and there are
advantages and disadvantages to each choice. The assistance of a
competent estate planning attorney will help you select the right
option for you and your family.