Should I do a Will or a Trust?

The first thing I always talk about with new clients is whether they want to create a Will-based estate plan or a revocable living trust. Despite the fact that nearly every financial planner on television seems to try and frighten people into creating trusts, they're not always the right vehicle for every client. Every parent wants to put together a plan that will name guardians for minor children and manage money for children until they are adult enough to manage it for themselves. Most couples want to put together a plan that protects a surviving spouse and incorporates estate tax planning in case one spouse survives the other. These are all great reasons to make an estate plan. But all of those objectives can be accomplished with either a Will or a trust.

I tell my clients that, basically, a Will and a trust are two roads to the same destination. You can meet all of your objectives with either kind of legal document. There's no essential difference in the "what" that either kind of plan can accomplish. The difference is all about the "how" and about "how much" and "how long" things will take after there's been a death.

A Will requires probate. Probate is the way that courts supervise the administration of estates: an executor must be appointed, assets must be identified and valued, creditors must be notified, bills and taxes must be paid, and all of the right people must be notified before an estate can be distributed. That means that if you have a Will, and that Will establishes trusts for children, for example, those trusts cannot be funded until the probate is completed. Probate is also expensive in California--lawyers and executors are entitled by law to be paid a percentage of the value of the estate going through the probate process. This percentage starts at 4% of the first 100K; then 3% of the next 100K; then 2%of the next 800K; 1% for the next 9 million; .5% of the next 15 million.

A $1 million dollar estate, for example, means $23,000 in fees, for both the attorney and the executor (if that executor chooses to take that fee). Worse, the value of real property is the fair market value of that property, not the equity in the property held by the deceased person. And finally, probate is a public process. Every document filed in court becomes a public record.

Living trusts are popular because they avoid probate if they are properly funded. Instead of a court-driven process, trust administration is private, and, although the same essential steps must be followed (people must be notified, bills and taxes must be paid, and assets must be identified and valued), there's not a court calendar that determines when these things are done or that determine when the trust's assets can be distributed to the beneficiaries. Trusts can often be distributed more quickly and result in lower legal and administrative fees than a probate proceeding. In Silicon Valley, where housing prices are so high, trusts can be many times less expensive to administer than a probate of the same properties. And estate plans that are built around living trusts still incorporate a simple Will, allowing parents to nominate guardians for minor children.

Given their differences, when would it make sense to choose one kind of estate plan over another?

When It Makes Sense to Do a Will
  1. Clients who don't have children will sometimes choose a Will over a trust because it costs less to do a Will. They don't mind that it costs more to administer a Will later because, after all, they'll be dead.
  2. Clients who don't own real property will sometimes choose a Will over a trust because they can designate beneficiaries for all of their assets and don't need to avoid probate as a result. A simple Will can determine who should inherit their personal property, but all of their major assets can pass to their loved ones free of probate via beneficiary designations. This is often a couple who has retired, sold their home, and is living off of their retirement and investment assets.
  3. Clients who don't own real property yet, because they are just starting out, don't need a trust. This client is sometimes a graduate student at Stanford with young children and no clear idea, yet, of where they'll settle down. They want to name guardians for their children, and the Will is the only way to do that. They can set up a trust when they settle down and buy a house.
  4. Clients who have minor children and are facing economic uncertainty can't always afford to create a living trust. It happens in this valley -- people get laid off. For families that are facing economic hardship, a Will can be a great way to put the basics in place. I tell these families that they should do what they can afford to do now. They can always upgrade their estate plan later on, when they can afford to do so. I tell them that they shouldn't feel guilty about this -- sometimes the right tool for the job is the one that you can afford to use. I tell them about the windows in our house--when we bought the house, it came with the original 1953 windows. They worked well enough-you could see through them and they went up and down. But when we could afford to replace them ten years later, the house was quieter and cooler in the summer and warmer in the winter. Still, for the ten years when we couldn't replace them, the old windows worked well enough and we had other priorities to take care of.
When it Makes Sense to Do a Trust
  1. Clients who own real property and can afford to do a living trust should create one. The savings are often 10:1. Spending $5,000 to create an estate plan that includes a living trust can save a family close to $50,000 in probate fees for a house valued at a little over $1 million. For costs savings like that, a trust is a great investment.
  2. Clients that are concerned about privacy should create a living trust to keep family secrets out of court.
  3. Clients that want to settle their estates quickly should create a living trust because these can almost always be administered and distributed more quickly than a probate can be completed.
  4. Clients that want to make sure that their assets can be managed easily in case of incapacity should create a living trust because they can name a co-Trustee to help them manage their trust assets and the hand-off can be seamless.
Either a Will or a Trust is Always Better Than Doing Nothing

In the end, either plan is a huge improvement over doing nothing at all. Without an estate plan, parents run the risk that guardians will be appointed for their minor children that they didn't nominate, and everyone runs the risk that their estate will pass to family members not of their own choosing. Without an estate plan, people can become incapacitated with nothing in place that will allow their loved ones to take care of their finances or make medical decisions.

If you or anyone you know has questions or concerns about whether a Will or a trust is more appropriate for their situation, feel free to get in touch or to share this article with them.