Wills vs. Living Trusts

By Steven W. Allen, JD

The Will

Let's begin with the most basic estate planning tool: the will. Most people know about wills and fully intend to have one . . . some day. However, American Bar Association surveys indicate that only 19 percent of American adults have a will or any kind of a document that directs the transfer of their property upon their death. A will allows you to design your plan to distribute your real property and other assets. It also allows you to direct the division of your estate to your family or other heirs.

Intestate Will

In reality, people who don't have a formal will actually have chosen a will by default. That means those who don't have wills have decided to let their state government choose the manner in which their estates are disbursed. Whether or not they approve the conditions, the intestate laws of the state in which they reside at the time of their deaths have prepared wills for them. State legislatures have passed laws defining how an individual's property is to be distributed in the event of his or her death without a will. Generally, intestate laws dictate that an estate passes to the nearest relative. This may be exactly what you would want to have happen. But, too often, it isn't. That's the first reason to have your own will prepared: to ensure your laws are carried out - not the desires of the legislature or court system.

Holographic Will

A holographic will is written entirely in a person's own handwriting. All you need is a pen and a piece of stationery or even the back of an old envelope. As long as the document is in a person's own handwriting, dated and signed by that person, most states will consider this a valid and legal instrument. A holographic will doesn't require any other formality, such as witnesses or a notary.

If your will isn't in your own handwriting, most states require that you have at least two witnesses and some states require three witnesses. These witnesses must be in your presence as you declare the document to be your last will and testament. They must see you sign the document. And they must be able to verify that you aren't acting under duress, you're of sound mind, and are of the age of majority (over 18 or in some cases 21).

You may want to go a step further than the holographic will and have a professional prepare your will for you. Good reasons exist for pursuing such a course of action. For example, even though you know exactly how you want your property to be distributed, you may find it difficult to communicate your desires accurately in writing.

In a real-life example, a wealthy woman in San Diego decided to write her own will in spite of owning a large estate. Upon her death, it was discovered that in her will, she had left one-fourth of her estate to the archbishop of San Diego. A truly magnanimous gesture! But her innocent generosity created a surprising problem. An archbishop of San Diego didn't exist! The Catholic Church in Los Angeles had an archbishop but his area didn't include San Diego. Also, the Episcopal Church in San Diego had a bishop but he was not an archbishop. Those two religious organizations fought over that woman's estate. Finally, the courts decided which church would inherit her property. What a tragedy that this woman hadn't made it perfectly clear who she intended to receive her bequest. I'm sure it was clear in her mind which church she had chosen to inherit her property and benefit from her bequest. Yet a lengthy and costly court battle ensued because of the nebulous way she wrote her will. A good attorney could have helped avoid this problem completely.

Probate and Its Problems

Many people are unaware of all the problems that probate causes. They're also unaware that they can avoid probate by using of a revocable living trust. Most of my clients have learned to trust the trust! Yet some people still want to have their estate planned with the use of a will. That's fine with me. At least I know they're making an educated decision and I'm happy to prepare a will for them.

True Cost of Wills

When you die, what does it cost to carry out your carefully laid plans? Many people believe it's simply the cost to create the document that plans their estate: their will or trust. If your attorney draws up a will for you, it may cost $400. However, upon your death, your estate goes through the probate process. Then the fees for settling your estate could easily reach $10,000 (the average cost of probate). Now the total cost of settling your estate isn't $400 - it's a whopping $10,400. This explains why a will is one of the most expensive legal documents in this country.

Trusts have different names. A "living" trust is established while you're living - the trust must do what you would want it to do upon your death, as if you were still living.

A living trust is sometimes referred to as an inter vivos trust. Inter vivos is Latin for between the living. (Some people believe it sounds more prestigious if you use the Latin terminology.) Promoters might call this type of trust a loving trust because it promotes love and unity among the family. It's often referred to as a revocable trust or a revocable living trust because you may alter, amend, or even revoke the trust during your lifetime.

This is the opposite of an irrevocable trust, which you can't alter, amend, or revoke after it has been established. Some people refer to the living trust as a grantor trust because the person who establishes the trust is the grantor who retains control during his lifetime. They're talking about the same kind of trust with the same characteristics, so don't be concerned about the different terminology.

Let's review the basic requirements and parameters of a trust:

1. A trust must be in writing - The document must outline, elucidate, describe, and incorporate all of its terms.
2. 1. A trust must have a grantor - Also called the settlor or trustor, this is the person setting up the trust.
3. 2. The trust must have a trustee - This is the manager who controls, operates, and manages all the property held in the trust.
4. 3. The trust must have a beneficiary - This person or persons inherit the estate.

The property won't be tied up in the courts. It's available for immediate use by the successor trustee to benefit your heirs - without probate. In addition, the settlement of your estate remains private.

Another great benefit of a trust is the privacy factor. When the trustees die, no one will need to file the trust with the court. Or record it. Or make it a matter of public record. It's a private document. Only those who have a need to know will be given information about our trust.

The privacy issue is certainly beneficial. However, the most important consideration in choosing between using a trust or will is generally bottom-line costs. An attorney can prepare an average will for $400 to $500 and set up an average trust for about $2,000 to $2,500. (Of course, those costs depend on the attorney you hire and the complexities of your particular estate.) It doesn't require a CPA to immediately figure that it costs five times more to set up the average trust versus the average will. The key words here are "set up." The prices I just quoted are for exactly that - "setting up" your will or trust. Those up-front costs don't include the cost of administering your wishes after your death.

Remember that the average trust costs $2,000 to $2,500 to set up, but there's no probate. A trust eliminates the total cost of probate and that potential $10,000 probate fee. Plus your successor trustee has the immediate right to distribute your property according to the plan described in your trust. He doesn't have to go to a court or even hire an attorney to settle the estate.

Your successor trustee might feel unsure about how to distribute your property according to your trust and want to have some counsel and advice. Often, the successor trustee will go to an attorney to review the trust document and learn how to proceed. Let's assume this happens. The attorney visits with the successor trustee and may prepare some transfer documents. The attorney charges a few hundred dollars for this service. (The average fee to review and help settle an estate with a trust is about $500.) Now the total cost of your estate plan is $2,500. Compare this to using a will for your estate plan, which would cost $10,400. It doesn't take a CPA to figure out that a will actually costs four times more than a trust!

How would your heirs be affected by the probate process?

Do a quick estimate of the current value of your estate including the equity in your home, your investments, and other property. Then ask yourself this question: "If both my spouse and I tragically die tomorrow, how will the probate process affect our estate and, more important, impact our heirs?"

How would your heirs be affected by the trust process?