Estate planning is planning one’s affairs both during life and for after death. Proper estate planning determines ownership structures and purposes of an individual’s assets during the individual’s life, while also planning for the distribution and management of an individual’s assets after death.
Estate planners use multiple tools to accomplish an individual’s goals in their estate planning. Two of the most common tools are Wills and Trusts. Both have a common place in the language of the business world. However, individuals who are looking to plan for their estate often wonder whether they should rely on a Will to accomplish their goals and/or a Trust. This article is intended to assist individuals in their own individual analysis regarding whether they should implement a Will-based estate plan or a Trust-based estate plan.
A Will is a document that is used to convey an individual’s final wishes about the distribution of the individual’s assets and debts. A Will tells an individual’s heirs at the time of death what assets the individual has and to whom the individual wishes the assets to be distributed.
A Will also designates a Personal Representative, otherwise known outside of Idaho as an Executor, to see that the estate’s assets are distributed according to the Will. A Will also designates a Guardian and a Conservator for those individuals who have minor children. Establishing a Will is a great first step in the estate planning process because it attempts to clearly provide instructions as to who are the heirs of the estate and the distribution of the individual’s assets to those heirs.
Generally, an individual who dies without a Will, or an estate plan, is subject to State law to determine the distribution of the individual’s assets. This is called dying intestate. A Will however, does not avoid the probate process simply by virtue of its existence. A Will is still subject to the probate process, which can become costly due to court and legal fees, especially if the Will is contested by the heirs. Having a Will, however, does gives an individual the control over the distribution of his/her assets, leaving the State out of those decisions.
The Trust is an instrument where an individual, the Trustor, may place its assets in the care of another, the Trustee, for the benefit of a third-party, known as the beneficiary. The Trust is governed by the Trust Agreement, which identifies the Trustor, Trustee and beneficiaries, and outlines the terms by which the Trustee is to administer the trust assets for the benefit of the beneficiaries.
In addition to the Trust Agreement, the Trust must be properly funded in order to accomplish its intended purposes. This means that the Trustor’s assets must be placed in ownership/possession of the Trust or Trustee.
The benefit of a Trust is that, if executed and funded property, it can have the effect of avoiding probate, and creating a smooth and seamless transfer of ownership of assets at the time of the Trustor’s death. Trusts are more complex documents than Wills and are a more expensive to create than a Will. Keep in mind, individuals who create Trusts, also must create and sign a Will. This type of Will is called a Pour-Over Will, and will direct any assets left out of the Trust into the Trust.
There are important things to consider whether a Will or a Trust is right for you in your own estate plan. First, consider the cost. For an estate of an average net worth, the primary benefit of a Trust is probate avoidance. The costs of probate may not exist when the administration of an estate is done by Trust, because the Trustee will have the authority to do what is needed to execute the Trustor’s wishes. Creating a Trust can also be costly. A cost benefit analysis comparing the costs of a Trust and the costs of probate might assist you in making your determination whether your estate plan needs a Will or a Trust.
The second thing to consider is the ownership of real estate, particularly real estate investments. A Trust creates for a smooth distribution of real estate because title may be transferred by the Trustee to the intended beneficiaries seamlessly, whereas if real estate is transferred by a Will, the real estate assets are retitled through the probate process.
A third thing to consider in a decision is the management of estate tax liability. The estate tax exclusion is now so high that it is rare that individuals should have to consider estate tax management. However, historically the exclusions have not been as high, and more individuals and couples relied on Trusts to assist them in their management of estate tax liability.
Lastly, when deciding between a Will or a Trust is peace of mind. Although there may be logical arguments to one or the other, an estate plan is a plan to provide you peace of mind. There may be one estate planning tool that may accomplish that goal better for you over the other.
The pros to estate planning are endless. Either a Will or a Trust has the ability to provide a plan for you during your life, and to execute your wishes upon death. This article provides the first step in assisting someone in making the decision between a Trust and a Will.