JUNE 6, 2011 VOLUME 18 NUMBER 20
Last week we answered a pair of questions from our readers and solicited others. Almost immediately we received an excellent question:
What are the factors you look at to determine if a client is best served w/ a will and durable power of attorney or a living trust? In other words, what are the key factors that would lead you to recommend a living trust?
Let us start with a quick disclaimer: the answer to this question is significantly different from state to state. What is true in Arizona may not be the same in other states — and some states will be wildly different. Even for lawyers in the same state there is significant difference of opinion; we are fond of saying that if you ask ten lawyers for their opinions you are bound to get at least fifteen strongly-held, well-reasoned views. Disclaimers aside, what follows is our take on the question.
We think most people do estate planning for one or more of these four reasons:
- To minimize taxes. Usually, but not always, that means estate taxes.
- To avoid probate, or (more broadly) to simplify matters for their heirs or successors.
- To control the way their assets are used after their death.
- To make it easier for someone to handle their affairs in the event of their own incapacity or disability.
Which does better at each of those tasks, a will and powers of attorney or a revocable living trust? In almost every case the trust will handle each of those tasks better than a will and powers of attorney. But that is not really the right way to address the question. Since trusts are somewhat more expensive to prepare (assume your lawyer will charge from three to ten times as much for preparation and “funding” of a trust as for a will and powers of attorney) and involve some extra effort, the analysis really becomes one of cost vs. benefit. Will the extra expense and effort of creating a living trust generate enough savings of time or money for heirs that it will turn out to be the right choice?
For most people, the answer is unclear. There are a handful of our clients for whom the trust is unquestionably the right technique, and another handful for whom the trust is not harmful but simply too much legal help for a problem that doesn’t exist. But most of our clients fit into the large middle ground — it would not be foolish of them to opt for a living trust, and it would not be foolish of them to avoid the expense and trouble now and let their heirs deal with it later.
So how do those four estate planning goals relate to the will vs. living trust question? Here’s what we think:
Taxes. Few people need to worry very much about estate taxes these days. With a federal exemption set at $5 million, and no Arizona state estate tax at all, only a tiny fraction of clients have estates large enough to make their decisions on the basis of tax effect.
It is true that the federal estate tax is scheduled to return to the $1 million level in 2013. It is also true that the Arizona legislature could decide to reimpose an estate tax (though most people think that highly unlikely). But for most people, even a taxation level set at $1 million would not make any difference in their planning.
But that’s not the end of the inquiry about taxes. Even if your estate is large enough for you to worry about estate taxation, there is no inherent tax benefit in living trusts. There used to be a way for married couples to lower their combined estate tax bill if their total estate was over the taxation level, but even that has changed (though of course it might change back in 2013). Bottom line: estate tax concerns simply do not drive the trust vs. will question in 2011 the way they did in, say, 1999. And if you are unmarried, or if you are married and your combined estate is less than about $1 million, you simply do not care about estate tax considerations.
Probate avoidance. Arizona’s probate process is not nearly as complicated as its reputation would suggest. It is also not nearly as expensive. Have you read stories about estates that have gone entirely to the lawyers because of a messed-up probate system? Yes, it does happen — but not really because of the system so much as because of family disputes over the validity of documents (including, increasingly, living trusts).
That said, most people will say that even a modest probate cost and time spent in lawyers’ offices would be something worth avoiding. What you need is a solid estimate of what it would cost to probate your estate if you relied on a will instead of a living trust, so that you can compare that cost to the cost of opting for a living trust. It is too hard to generalize about either expense, but we are prepared to go this far: in Arizona, the cost of preparing a living trust (and “funding” it — transferring all your assets into the trust’s name) will almost always be less than the cost of probating your estate later. But not necessarily by much.
There are some other points to be made here. If you own real estate in more than one state, your will must be probated in each of those states (unless you create a living trust or other probate-avoidance mechanism for some or all of those properties). That can drive the expense up considerably, and certainly complicates things for your family. On the other hand, if you have less than $50,000 worth of personal property and no real estate at the time of your death, no probate proceeding is likely to be needed anyway, since there is a “small estates” affidavit mechanism to avoid the probate process.
In general terms, larger estates tend to be more complicated to administer. More complex estates are better candidates for a living trust. So if you are wealthy, probate avoidance is more likely to be a concern for you — and especially if you have unusual assets, or real estate in multiple states, or other uncommon kinds of property issues.
One special consideration here: if you are married, you are probably comfortable putting most or all of your assets in “joint tenancy with right of survivorship” or designating your spouse as beneficiary. You might not feel the same way if you are single; it is not quite as easy (or advisable) to put your children or other beneficiaries on your bank and stock accounts as joint owners. So single people are usually better candidates for living trusts as a means of avoiding probate.
Control. We use the word advisedly. That’s what you might want to do with your funds, even after your death. Are you in a second marriage, with children from the first marriage, and a desire to provide for your spouse but ultimately pass most of your estate to those children? Maybe you have a spendthrift son (or a son who has married a spendthrift). Perhaps your daughter is disabled, and receiving government benefits she would lose if you left her an inheritance outright. Or maybe you want your money to be a retirement fund for your children, or to encourage your grandchildren to get an education, or some other laudable goal you are trying to achieve.
How can you address all of those issues? By putting your money in trust, with a trustee who has been instructed on how you want the money to be used.
You don’t have to create a living trust to put your money in trust. Instead you can create a trust in your will — what we lawyers call a “testamentary” trust. But it will cost you more, and the difference between the cost of a will (with your testamentary trust) and a living trust will shrink. So if you need (or just want) to control the uses of your funds after your death, you will be a better candidate for a living trust.
Your own incapacity. This is why you should sign a power of attorney. It is simultaneously one of the most important documents in your estate plan, and the single most dangerous one. But the cost of going through the courts (in a probate-like proceeding called a conservatorship) is almost always high and the invasion of privacy significant.
There are some times when a power of attorney just won’t solve the problem, though. Plus it is hard to predict when those times arise. Banks, title companies, the federal and state governments — none of them are required to accept the power of attorney. If you sign a living trust and transfer all of your assets to it, though, the problem becomes simpler and narrower: if your successor trustee can show the item the trust calls for (like a letter from your doctor, for instance), then the successor trustee just takes over. There will probably be somewhat fewer problems administering your affairs with a living trust than with a power of attorney.
We don’t want to overstate this benefit, however. It is almost never valuable enough to justify creating a living trust all by itself. As far as we are usually willing to go on this score is to suggest that, if one or more of the other categories make you a good candidate for a living trust, this one might put you over the top.
There’s one more category of living trusty candidates we can suggest: those who are more likely than others to (how can we say this gently?) “use” their estate plans in the next few years. In other words, the older you get the better of a candidate you become for a living trust.
So who should be considering a living trust as part of their estate plan? Look over the explanations above, and you will see that you are a better candidate for a living trust if you:
- are older
- are not married
- are wealthy
- have children who are not children of your spouse
- have complicated assets, and especially if you
- have real estate in more than one state
- have beneficiaries with special needs, inability to handle money or other similar considerations
Again, we caution you against putting too much stock in these descriptions or applying them to your situation without good legal counsel. But look over this list of considerations and think about what they say about your estate planning needs. Share them with your own lawyer and ask for a thoughtful, critical evaluation. Your family and heirs will be glad you did.