Smart Estate Planning: Should You Have a Will or a Trust?


Estate planning is something that everyone knows they must do, but it is a path that many fear to tread. It requires collecting, synthesizing and collating information – and let’s face it, making decisions surrounding your own mortality can be just a bit unsettling. Nonetheless, life often forces you to confront this process, in most cases due to the large joys of life: entering into partnership with the person you love, having a child, and taking steps to ensure that the family you choose in your life will be well-taken care of in the event of your death. Taking the first step into this strange territory requires that you choose the process by which your assets will be distributed.

Bill Scherer, Scherer, Smith & Kenny. San Francsico, California. June 17, 2013As in many states, estate planning in California can be embellished through such things as establishing irrevocable trusts and life estates and purchasing life insurance, but distributing assets to beneficiaries essentially boils down to the use of one of two vehicles: (a) a formal vehicle that probates your will, or (b) a more informal vehicle that relies on the terms of your revocable trust. For ease of discussion, I’ll refer to the first as “formal probate,” and the second as “trust administration.”

If you ask your attorney to draft a will, the executor appointed through your will distributes your assets, and he must use the formal, statutory probate process, generally offered and overseen by the county court system in the county of your residence. On the other hand, if you ask your attorney to draft a revocable trust, the trustee appointed through your trust will have the authority to carry out distribution of your assets without the court’s formal oversight.

The IRS does not distinguish between either method for purposes of estate taxes, meaning that all of the tax credits, as well as the tax code and regulations, applicable to formal probate is likewise available to trust administration. Further, even though you may formally title your assets in a revocable trust, the IRS will not consider the trust to be an independent entity until your death.  This means you can continue to own, sell, purchase and encumber assets in a revocable trust just as you would if they are titled in your name alone.

Which is right for you?  That decision varies based upon the client’s needs. But here is a brief list of the main pros and cons of each method:

First, I generally use the following metaphor to differentiate formal probate from trust administration: imagine your estate is a “cake” consisting of your assets that are to be cut into “pieces” and served to your beneficiaries.

In the case of formal probate, you will leave all the cake’s ingredients scattered on the counter, and your executor must “mix the ingredients and bake the cake” through formal probate before cutting it into pieces and handing it out to your beneficiaries. Formal probate is time consuming and lengthy – in many cases taking a couple of years. However, drafting your will also takes less effort on your part because you are merely instructing the executor to whom to distribute your assets.

In the case of trust administration, on the other hand, the “cake” is largely already baked when it is, euphemistically speaking, ready to be “served,” since you must formally transfer real property and non-retirement assets into your revocable trust in order to get the benefits a revocable trust offers. Therefore, since you “bake” the cake prior to your death through the establishment of your revocable trust and contribution of your assets, it is more time-consuming (and therefore more expensive) to establish your revocable trust, but generally less work for your trustee and more efficient when distribution comes. And for that reason and the fact that it is not overseen by a judge, trust administration generally takes less time than administration through formal probate.

Even though drafting a will is generally less expensive than a revocable trust, you should also know that formal probate is nearly always more expensive than trust administration. This is because of the filing fees, court fees, bonding requirements, and statutory fees to which both the executor and his or her attorney are entitled to by law. This last point is nearly always the most important to the clients with whom I work.

However, if you are young, many believe that going through the more formal (and expensive) process of establishing a revocable trust is overkill when the chances that it will “mature” and be used is unlikely. They would rather save money today on the chance that their beneficiaries pay more later in trust administration.

Other factors to consider in choosing between a trust and estate are the following:

  • Formal probate for estates in which the surviving spouse receives the entire estate does not involve the same rigor, time, effort, or expense that is generally described above. As such, in those circumstances there is little cost or administration difference.

 

  • Because trust administration is not court-supervised, it is a more informal process that, in my opinion, is more prone to abuse. Therefore, if you choose trust administration it is important that you truly trust the persons you’ve entrusted to distributing your assets.

 

  • Once established, a revocable trust requires slightly more “tending,” since an asset must be properly contributed to, and titled in, your trust if it is to be distributed under it. Put another way, assets not contributed to a revocable trust must be formally probated. This is not a problem if the non-trust assets are valued at less than $100,000, but could be problematic if there are assets of greater value, or there exists real property that is not held in trust.

 

So based upon the foregoing, there are major factors that generally hew clients towards either a will or a trust, but there are other more minor and nuanced considerations that might ultimately determine your decision to draft a will or trust. My hope in providing this brief analysis is that you will be much better able to have a knowledgeable conversation that permits you to choose the right vehicle for yourself when you hire counsel to draft your estate plan and estate planning documents.

 

About Bill Scherer

Bill Scherer is the founding partner of Scherer Smith & Kenny LLP in San Francisco.  If you wish more information regarding wills and trusts and the best means of establishing your estate plan, please contact Bill Scherer at wms@sfcounsel.com for more information. Written by Bill Scherer, Scherer Smith & Kenny LLP © 2014

 

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