Should 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 and owns over $50,000 in personal property and/or $75,000 in real property in his name alone. 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 $3.5 million.

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. The 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. Simply 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 $3.5 million. The disadvantage is the cost of establishing a trust, which is substantially more than creating a simple will.

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.

Factors. 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 lifetime.

Tax Advantages of a Trust for Married Couples. 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 $4 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 $4 million estate is $2 million, because Wife already owned half of the estate.

• 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 $4 million estate, probate will be required after her death, and only $3.5 million of her $4 million estate is exempt from estate taxation. That $3.5 million will pass untaxed to her chosen heirs, under the terms of her will, but the remaining $500,000 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.

Conclusion. 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.