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Living Trust or a Will – What is the Best Approach?
© 2008
Heather K. Van Nuys
Van Nuys Law Office PLLC
1734
NW Market Street
Seattle, WA 98107
Tel.
206.784.9000
Should I have a Will or use a Living Trust?
The
popular word on the street is that people should use a “living trust” instead of a Will. A
living trust is the common name for a revocable inter vivos trust. That means it is a trust established
to take effect during the life of the person who creates it who can revoke it while he or she is alive and competent.
Many people are convinced they should use a living trust rather than a Will in order to avoid probate.
But, is that a good idea? How effective is the living trust?
For most people, these trusts are not necessary and have limited benefit. What’s worse, many who enter into revocable
living trusts make the common mistake of failing to fund the trust properly so it ends up not working as intended.
A trust takes some particular care and feeding to accomplish the intended results.
Should I use a Living Trust to avoid probate? The primary advantage touted regarding revocable living trusts is that
it will avoid probate. Generally, this is true but people often have to probate some assets in any event. In
many states probate is very expensive. California is a prime example. By contrast, the
probate in Washington State is relatively inexpensive, especially if there are no significant complications.
What is probate? Probate is the legal process by which the title to your property
will be transferred to those people you wish to benefit upon your death. Probate is also the process by which your Last Will
and Testament is submitted to the court, and those having a legally-recognized interest in your estate have the opportunity
to “contest” your Will if they have a valid reason to do so. Probate is also the process by which your creditors
must submit claims for payment, which claims must be submitted within certain time limits.
f you do not have a Will, there is technically not
a “probate,” but a similar process is followed in court. Since you have not designated who
should inherit your property the court will follows a State of Washington statute stating how your property will pass. Since
there is no Will, this process is called an estate administration, but this process shares many of the statutory rules and
the process is similar to the probate of a Will.
What property is subject to probate? When you die, property you own or
in which you have an interest will be subject to probate administration. You most likely own some property or assets that
will not be subject to probate because title to this property passes automatically. Examples of “non-probate”
property include:
1. Property
owned as “Joint Tenants With Rights of Survivorship,”
2. Property
subject to a beneficiary designation other than your “estate” such as life insurance, annuities, IRA’s,
other retirement plans,
3. Property
with a “Pay on Death” or “Transfer on Death” designation (usually available for bank accounts),
4. Property subject to a Community
Property Agreement that specifically states that such property passes to your surviving spouse upon your death,
5. Property titled in a revocable
living trust.
How does a revocable living trust avoid probate? A revocable living trust avoids probate
because there is not any property titled in your name upon your death. This holds true, however, only
if you were careful to change title of all you assets, transferring them to the trustee, before your death. For
example, if John Doe establishes the “John Doe Revocable Living Trust,” and transfers title to all property owned
by him (e.g., real estate, bank accounts, stocks, cars) to the “John Doe Revocable Trust,” then upon John’s
death, he doesn’t own any property—his trust does—and thus probate is avoided. The trust would provide for
how property will pass upon John’s death.
Probate avoidance sometimes
is an important goal. For example, if John Doe owned real estate in other states, his estate could be subject to probate in
multiple states. Even though Washington’s probate process is very streamlined and flexible, other states have probate
processes that require mandatory attorney, executor and appraisal fees and require extensive court supervision.
Further, if you are concerned about your
Will becoming a public document, then avoiding probate may be an important goal to you. Finally, if you are already assisting an elderly parent
with his or her financial affairs, your parent may find a revocable trust to be a convenient means by which to manage your
parent’s assets and pass the assets to your parent’s beneficiaries upon death. If your parent
named you as trustee you would have the power to manage the assets in the trust.
Are you really avoiding probate? Continuing with the John Doe example
from above, if John failed to re-title all of his assets into the name of his trust, or if he later purchased property in
his own name instead of the name of his trust, then a probate may nonetheless be necessary.
Washington probate. Probate in Washington is a very streamlined process compared to
some states. For example, in California, there are mandatory attorney and appraisal fees. Further, some states closely supervise
the administration of an estate, thus adding to the cost. Washington has what is called “non-intervention”
probate, meaning the court does not intervene with a high level of scrutiny.
If your Will states you want the executor to serve with “non-intervention powers” then the court will
likely step back and let the executor do all that is necessary to administer the estate, usually without need to return to
court for approval. This does not mean that the executor is free to do what he or she pleases. On the contrary, the executor
owes special duties to the beneficiaries, and the beneficiaries may bring any questionable activities to the attention of
the court.
However, assuming a normal estate administration
with a diligent executor and cooperative beneficiaries, probate administration in Washington is very reasonable. You will
need to consider the cost of establishing and maintaining a revocable living trust as that cost is weighed against the cost
of preparing and probating a Will. In both cases, upon death, there are costs associated
with valuing, reporting and transferring the assets. By contrast, with a revocable living trus there
is the additional cost of initially transferring the assets to the trust to avoid probate. Further, aa clear deadline for potential creditors to try to
collect money from your estate. Generally, there is a very short period of time, two to four months, for
creditors to file their claims if the appropriate notices are given in a probate-type procedure. Otherwise,
creditors’ claims could pop up many years after your death.
Estate tax savings. Some people believe (or are led to
believe) that establishing a revocable living trust will produce estate tax savings not available otherwise. This is simply
not true. The methods available to take advantage of both spouse’s exemptions to federal estate tax may be utilized
in a set of Wills or a revocable living trust. There are other special types of trusts used to reduce estate
tax, and those Wills are irrevocable, meaning that once you establish them you cannot revoke or change them.
Two popular examples are the charitable remainder annuity trust and the irrevocable life insurance trust.
Reasons to consider establishing a revocable living trust. If you have any of the following
circumstances or concerns, a revocable living trust—either in addition to a Will as your primary planning instrument
or in lieu of a Will as your primary planning instrument—may be right for you:
1. You
own out-of-state real estate (including most interests in timeshare condominiums);
2. You
are very concerned about privacy (you may be in a “non-traditional” relationship and do not want certain family
members knowing the particulars of how your property is passing; you may be a public figure); or
3. One
or more of your children or some other trusted person is actively assisting you with your financial affairs.
Are there other reasons to use a trust? One of the advantages of using a
trust is that you can have more control over the way income and assets are distributed to your chosen beneficiaries.
For instance, you may think your son is a bit irresponsible now and you think it wiser to distribute his share at various
stages in his life, such as a third at age 25, a third at age 30 and the balance at 35. Or, you may want
to give your daughter an incentive to attend college by withholding her inheritance until she receives her degree.
You can accomplish these goals using a trust. But, you
have the choice of having the trust be part of your Will, or have the trust stand alone as a Living Trust.
Sometimes
the best approach is to have both a Living Trust and a Will, with the Will handling the odds and ends that are overlooked
in the Living Trust. You can have your Will dump left-over assets into your Living Trust. This
is called a “pour-over” Will.
What is the most important factor in establishing
a trust? No
matter what kind of trust is used, the most important factor is who you select to be trustee. Will the
trustee really be capable of fulfilling his or her duties? Is he or she both capable and trustworthy?
A trust is a contract between the person establishing the
trust (called the “Grantor,” “Settlor,” or “Trustor”) and the person charged with administering
the trust, the trustee, to hold property for the benefit of one or more beneficiaries. It is common with a revocable
living trust that the person who establishes the trust is also the trustee as well as the current beneficiary.