Advantages of a Living Trust-Centered
Estate Plan over a Will-Based Estate Plan
By Teddy R. McNamara, Attorney at Law on August 8, 2015
There largely exists a misconception
about the functions of a Will and that of a Revocable Trust. In many ways the
two operate in the same fashion. For instance, both a Trust and a Will serve to
transfer the decedent’s assets to those that they have chosen as their
beneficiaries after they die. They also both nominate someone to be the Trustee
or Executor to pay any taxes, debts and handle the distribution of their assets
to beneficiaries after death.
However, there are far more
differences between the two than similarities. One major advantage that a Trust
offers is the retention of control over finances at incapacity. What this means
is that a Successor Trustee can handle your financial affairs without Court
interruption or supervision. There is no need for a petition to the Probate
Court for a Conservatorship. Think of a common scenario such as the following;
one spouse gets dementia and loses capacity to make financial decisions. Next,
the spouse with capacity needs to sell the house or refinance to downsize or
pay for assisted living expenses. However, the house is titled as joint tenants
with right of survivorship (which is how 9 out of 10 spouses hold title to
their homes in California) and the spouse who has lost capacity will not be
able to sign the documents to sell or refinance. Therefore, in this situation
the competent spouse is unable to fully manage their estate and would need to
initiate conservatorship proceeding to be able to sell or refinance the house.
This proceeding is public, costly and time consuming. Further, this is the last
thing a loving and supportive spouse wants to go through while caring for an
incapacitated spouse.
For a married couple, the
other spouse is typically a co-trustee of the Trust, so they can handle the
financial affairs of their incapacitated spouse. However, if both spouses are
incapacitated, a Successor Trustee can step into their shoes and act for them
both. A Trust can also include provisions for the manner in which care for
other family members is implemented should you become incapacitated or die.
Trusts also avoid Probate Court at
death if funded, whereas a Will does not avoid probate. Probate can last more
than 1 year and is very costly. Recently in San Diego the North County Probate Court closed and was consolidated with the downtown Probate Court. As a result the court is flooded with cases and it can takes months before you can get a hearing set. It does not provide any privacy and protection
from prying eyes. Some probates linger on for years until they finally end.
Probate is costly because the fees are based on the Gross, not net value of your
estate and the fees are set by statute. Expect to pay from 4 to 8 percent of
the estate in attorney and personal representative fees. There are additional fees for filing with the
court, publications and appraisals. Further, the attorney can ask for extraordinary
fees if the probate becomes complicated. Extraordinary fees are above and
beyond the statutory fees and are determined by what the judge considers
reasonable and just. Also, the time value of money is a factor to consider
because the time it takes to close a probate prevents beneficiaries or heirs
from freely investing the assets as they see fit. Many opportunities can be
lost during this administrative period. Also, probate files are open to the
public, so anyone can look at the files and determine who is inheriting your
money. Finally, probates are messy, frustrating and emotional for the loves
ones involved. The less planning the decedent has done means more work for the
loved one to search through endless records for assets or debts. This time
consuming process is stressful and emotionally draining for family members to
endure. With a Trust and proper planning, funding and continuity of management,
much of these hassles can be mitigated by planning ahead and staying
organized.
A Trust will need to be administered
at death, but the expense is typically much less than a probate proceeding. The
fees paid to the attorney are not set by statute; rather they are negotiated
with the attorney and usually on an hourly rate, although some attorneys do
charge based on the percentage of the estate. A trust administration is private
and the trust does not need to be filed with the court. There is no legal
mandate that you must publish notice of a Trust administration in the newspaper
like a probate. Although you could publish notice of a trust administration in
the newspaper which would shorten the statute of limitations on creditor
claims. Lastly, a Trust administration can be completed in months not years.
Although some trust administrations can last a long time.
Another benefit unique to Trusts is
the ability to plan the timing of distributions to children and other
beneficiaries. The timing can be based on several factors such as the age of
the beneficiary, an incentive program (like going to college) or even a dollar
for dollar matching program for beneficiaries that work in a low-paying, but
socially rewarding career. These are but a few of the many benefits that Living
Trusts have to offer.