By: Mark Anderson, Attorney
One of the most common questions that individuals want answered when planning their estates is whether to use a will or a trust for their estate planning. There are many “variables” in the formula for this question, and even then, there is the variable of personal preference that factors into the equation. Ultimately, an individual should use the method that is most in line with the estate planning objectives that they value the most. Below are some objectives in planning that an individual can accomplish using a revocable trust.
1 – Planning for incapacity. One of the benefits of a revocable trust is that it can plan for the incapacity of the person who creates the trust. If a person becomes unable to manage their own property, a successor trustee is able to step in to manage their affairs on behalf of that person. If a person does not have documents in place that provide for management of their affairs, management of the affairs of the incapacitated person generally will be subject to oversight of the probate court through a conservatorship proceeding, which is much more costly than a trust administration.
2 – Clarity in ownership. When property is owned by a trust, the terms of the trust will clarify that the trustee is managing the property for the benefit of the beneficiary, and not for the trustee’s own personal benefit. In some cases, individuals use joint ownership with survivorship features to plan their estates in order to give a 3rd party transaction authority over certain assets. Joint ownership often creates more problems than it solves. For example, if one joint owner has creditor problems, including obligations to a divorced spouse, the IRS, or other liabilities, the law may permit a creditor to place a lien on the jointly owned property. An additional problem created by joint ownership is how to handle a division of jointly-owned property in the event that the parties no longer want to own the property jointly. The terms of a person’s last will and testament generally do not govern property that is owned jointly with rights of survivorship.
3 – Clarity in administration. If an individual becomes incapacitated, their successor trustee will have clarity from the trust agreement with regard to the management of the property owned by the trust, who the lifetime beneficiaries are, and whether the trustee has discretion in making distributions. Discretionary authorities are critical in the event the beneficiaries require long-term care as discussed below with regard to Creditor Protection. Further, in circumstances where an individual marries later in life and has children from a prior marriage, a trust can clarify that a surviving spouse will have rights under a trust during his or her lifetime, but when the surviving spouse passes away, the property can then be distributed to the children of the spouse who passed away first.
4 – Creditor Protection. Proper trust planning and administration can incorporate creditor protection features for individuals who may end up in creditor problems. For example, an individual who creates a trust for a child can remain confident that the child will benefit from that trust for their lifetime with proper management, often in spite of the fact that they may have a divorce or bankruptcy. Assets owned by an irrevocable trust generally are not considered to be owned by the beneficiaries, and therefore, not subject to claims of the beneficiaries’ creditors. In cases where a person requires long-term care, assets inside a trust can be considered supplemental, and they won’t disqualify a person in need from receiving certain government benefits.
5 – Avoid a public probate proceeding. This consideration goes hand-in-hand with the consideration of planning for incapacity. A revocable trust keeps a person’s financial matters out of the probate courts upon the death of the person who created the trust, as well as upon their incapacity. A probate proceeding is a process governed by state statutes, whereby the assets are accounted for, managed by an executor, and divided among a person’s heirs or their named beneficiaries. A trust administration is a private proceeding, disclosed only to the beneficiaries, whereas many aspects of a probate proceeding are made available to the public.
6 – Income tax and estate tax planning. Trust planning can be a critical aspect of minimizing income tax and estate tax obligations. Trusts can be used to stretch out benefits under retirement accounts, and yet still make sure that the retirement accounts benefit the appropriate individuals in accordance with an individual’s wishes. Trust planning can protect life insurance proceeds from both income tax and estate tax, and can preserve federal estate tax exemptions for both spouses.
7 – Cost. The cost to create a revocable trust generally is greater than the cost to create a will. A trust also is a separate entity that must be funded, which means that assets must be re-titled to the name of the trust if an individual wishes for the assets to be governed by the trust. However, the administrative costs are nominal when compared with the costs of litigation, taxes that shouldn’t have been paid, and loss of principal to creditors. The greatest cost may be that a person’s wishes in some cases are not effectuated simply because the individual chose not to invest the money in an estate plan that would have memorialized their wishes properly.