For most of us, the choice of an estate planning strategy boils down to one simple question: Do I need a will, a trust, or both?
Both are valid options, depending on a person’s circumstances. For some, a hybrid mix of the two may be the best choice. It all depends on what your objectives are, and how either method operates under the specific arena of California law.
In this article, we take a look at the core differences between a will and a living trust, and the specific advantages – and disadvantages – of both.
A basic understanding of these two core methods of estate planning will allow you to decide which is best suited to your own specific needs.
The Last Will and Testament
A last will and testament likely needs no extensive explanation. Most people are familiar with the concept, as it has been with us for a long time. A last will is a written record of a person’s wishes for how things will be handled after they pass away. More concisely, the testator directs the distribution of their estate – the what, the how, and to whom; nominates guardians for any minor children; and nominates the person who will be serving as the executor or administrator of the estate.
It all seems pretty straightforward. But there are some practical effects of having a will.
For one thing, it only takes effect after a person passes away. So while it might be an effective means of transferring assets to your selected heirs and successors after you die, it is wholly a post-mortem estate plan. A last will and testament does nothing for the living testator except perhaps give them some peace and mind.
Secondly, a will must pass probate. That means that the person’s estate passes into probate, where a will, if passed, determines to a large extent how the estate is to be administered and ultimately, distributed. Any approved debts or liabilities are paid from the estate, and anything remaining are generally distributed according to the will.
A will is the traditional estate planning tool in the sense that it helps a person prepare for their inevitable demise.
These days, however, estate planning has evolved to something more than about what happens after you die. Estate planning, if done properly, can help a person structure their assets and finances for specific objectives other than simply transferring properties to heirs.
The Revocable Living Trust
A trust, pared down to the basics, is a contractual and legal arrangement whereby a settlor or grantor transfers their personal assets into the trust. These assets become trust assets, which are administered by a trustee, for the benefit of specified beneficiaries.
Where a will is intended to take effect after a person’s death, a trust is created and administered during the grantor’s lifetime. In fact, most trusts usually start off with the grantor himself or herself serving as the initial trustee to the trust.
From a practical point of view, the grantor is no longer the owner of the trust assets. Legally speaking, the assets now belong to the trust, though they are often held in the name of the trustee, in their capacity as trustee of the trust. The practical effect, however, is that the grantor, for the time that they are acting as trustee, still maintains full control over the assets.
The one benefit of transferring assets into a trust is the continuity of the administration of assets. Should the grantor become incapacitated or pass away, the named successor trustee steps in and takes over, administering the trust according to the terms set down in the trust documents, or the grantor’s original instructions.
These assets are no longer stuck in a sort of limbo where decisions need to be made as to whether or not they belong to the estate and therefore need to be consolidated and administered under probate.
And because they no longer belong to the grantor in his personal capacity, and are no longer part of his estate, should the grantor pass away, creditors of the grantor cannot claim against the said assets.
Trusts and the Avoidance of Probate
One of the most common reasons that people prefer a living trust over a will is to avoid probate.
Probate can be an expensive and time-consuming process. This is especially true if it includes will contests and other challenges brought by interested parties against various aspects of the probate proceeding. Litigation can ensue, which means additional costs and a delayed close to the probate proceedings.
Trusts avoid probate altogether. That is, trust assets are often distributed according to the terms of the trust, without the need of going through probate.
This doesn’t mean that litigation won’t ensue. Litigation is still possible, of course, especially if there are adverse claims. But generally, trusts are far more straightforward because trust administration occurs outside of probate. In probate, court supervision, mandatory waiting periods, mandatory notices, creditor claims, and a process for settling or resolving disputes occur as a matter of course.
Living Trusts and Incapacity Planning
One of the advantages of a living trust is that trusts are a form of estate planning that takes into consideration a person’s incapacity during their lifetime. Wills, as we have seen, really only activate after the testator’s death.
This means that a grantor or settlor can make provisions for their final years, or for any contingency wherein they may no longer have the capacity to take care of themselves or make decisions with respect to their finances or asset management.
A person can become incapacitated either due to illness or accidents resulting in injury. If that happens, the successor trustee can step in and manage the trust according to the instructions of the settlor. This transition can happen quickly, even without court intervention. It is a strong type of contingency planning to address the unexpected while taking care of a person’s assets and the welfare of one’s family members.
Privacy vs. Public Record
Yet another reason why most people prefer a living trust over a will is the sense of privacy it affords a person.
Wills are required to go through probate, and probate proceedings are public record. This means that many details of a person’s estate and its administration may become accessible to the general public.
Privacy is no small thing. Publicly accessible information about a person’s finances, assets, properties, business assets, liabilities, and how an estate is to be distributed can potentially lead to disputes, third party claims, and a lot of unwanted attention. Litigation regarding a person’s estate may become fodder for the media.
Not exactly the best thing for a grieving family.
A trust, on the other hand, is typically private. Unless litigation is involved, the creation of a trust, its administration, the distribution of trust assets to the beneficiaries – these are typically handled privately, outside of court and therefore outside of public attention.
If you are dealing with sensitive family information, confidential business secrets, or would simply like things to be handled privately and discreetly, utilizing a living trust for your estate planning is far preferred over a will.
A Comparison of Costs
When it comes to cost, the question to ask yourself is whether you would like to deal with the cost of your estate planning upfront, or leave it to the heirs and beneficiaries to contend with.
Because while a will costs practically nothing – especially if you’re doing it yourself, a trust is not quite so cheap. Setting up a trust would require payments that go to the fees of setting up the trust and the preparation of all the necessary paperwork. Then again, the trust itself needs to be funded – which means that the settlor would have to transfer assets into the trust. Upfront, a living trust costs higher compared to a simple will.
But the difference lies in the long-term value of a trust.
A will going into probate would also require the payment of fees and other administrative costs and expenses that would have to be dealt with after the death of the testator. These fees and payments would come from the estate.
While California does provide for fixed statutory fees for probate proceedings based on the value of the estate, this does not include fees for any litigation that might ensue during the course of the probate proceedings. If it should happen that probate of an estate involves will contests, disputes and claims, it is conceivable that the cost would end up higher compared to the upfront cost of a living trust. It might even be conceivable that the entire estate could be swallowed up by costs, expenses, fees, and the payment of debts and creditor claims.
Bottomline is, consider carefully the advantages and disadvantages of a will vs. a living trust. For a small estate, a will may be sufficient. For some high value estates, a living trust may be indispensable. For more complicated estates, a hybrid version utilizing both a trust and a will may be needed.
Trying to decide which option is better for you? Schedule a call with us today and we can help you assess your options.