By David J. Brillant, J.D., LL.M. in Taxation

Today, individuals transfer wealth at their death either through the use of a Will or a Trust and sometimes both.  When a client begins the estate planning process, the first large issue to address is to use a Trust or a Will to transfer wealth.  This article will help clients analyze which method of transferring wealth is most appropriate for their circumstances.

Wills
A Will provides for the distribution of wealth owned by you at the time of your death in any manner you choose.  A Will cannot, however, govern the transfer of certain assets such as joint property, and only life insurance and retirement plans are distributed in accordance of your Will if the beneficiary is your estate. 

Wills can be of various degrees of complexity and can be utilized to achieve a wide range of family and tax objectives. A basic Will is one that simply distributes wealth to named individuals or entities.  It is very difficult to maximize tax savings through the use of a basic Will.  On the opposite extreme, Wills can be as complex as some of the most intricate Trusts.  In fact, a Will can establish one of more Trusts and achieve substantial tax savings.  These Wills are called testamentary Trusts or a testamentary Trust Will.  Even if you have a Trust, it is always advisable to have a Will that transfers property left outside of the Trust into the Trust.  These Wills are called pour-over Wills because they pour-over the assets outside of the Trust into the Trust.   

In addition to transferring wealth, Wills achieve a number of essential objectives including:  

Trusts
The term Trust describes the holding of property by a trustee (which may be one or more persons or a corporate trust company or bank) in accordance with the provisions of a written Trust instrument for the benefit of one or more persons called beneficiaries. A person may be both a trustee and a beneficiary of the same Trust.

If you create a Trust during your lifetime, you are described as the Trust's grantor or settlor, the Trust is called a living or inter vivos trust, and the Trust provisions are contained in the Trust agreement or declaration. The provisions of that Trust document determine what happens to the property in the Trust upon your death.

A living Trust may be revocable (subject to change and/or termination by the settlor) or irrevocable. Either type of Trust may be designed to accomplish the purposes of property management, assistance to the settlor in the event of physical or mental incapacity, and disposition of property after the death of the settlor of the Trust.

A common misconception is Trusts are only for the wealthy.  In fact, Trusts are used by individuals with varying degrees of wealth.  Young parents with modest wealth chose to create a Trust as opposed to a basic Will with their children as beneficiaries in order to control the distribution of wealth to their children. 

A second common misconception is Trusts avoid Estate taxes.  This is entirely false.  Trusts are used to help reduce Estate tax liability but in no way can it eliminate estate taxes entirely.  Any person or organization marketing the idea Trusts can eliminate Estate taxes should be reported to the Internal Revenue Service.

Why to Choose a Trust Over a Will
People opt for a Trust over a Will for four basic reasons.  First, in states such as California, the Probate fees are significant.  Not only is the attorney who handles the Probate paid a significant sum, the executor of the Will is paid an equally significant sum.  A probate estate valued at $2,000,000 will have probate fees of approximately $32,250 to both the attorney and the executor for a total of two fees equaling $64,500.  While these fees are negotiable, many times attorneys will not negotiate off this fee. 

Instead of paying these statutory probate fees, it is far less expensive to create a Trust and upon the death of the grantor(s) retain a lawyer to distribute the assets in accordance with the Trust’s distribution provisions.  Further savings can be had by retaining an attorney experienced in Trust administration to administer a Trust than general practitioners who have no experience in Trust administration. 

A second reason individuals chose a Trust over a Will is to create a plan that preserves wealth for future generations.  Currently, the federal government imposes estate taxes at a maximum rate of 45% on gross estates valued over $1,500,000.  In states with high property values such as California, it does not take much to have a taxable estate.  Many times, the real property holdings alone will cause an estate to be taxable and that does not include the balance in ones qualified retirement accounts, non-qualified retirement accounts and death benefits through life insurance.  A Trust can maximize and preserve wealth by placing provisions in the Trust that take advantage of certain credits and deductions that otherwise would not be as powerful if assets were not in the Trust. 

Thirdly, the issue of time in which an individual’s wealth is transferred is a major concern for all involved.  Wealth being transferred to beneficiaries through the Probate Courts takes at least 12 months before a Court will permit its final distribution.  While Court’s permit interim distributions, in the event the Will is challenged and litigation ensues, it will be a significant period of time before the Court permits a distribution.  If an individual choose a Trust, ultimate distribution of wealth occurs much more rapidly.  In some instances, a Trust can be fully administered in a matter of months.

Finally, the issue of publicity encourages individuals to transfer wealth through the use of a Trust as opposed to a Will. A Trust is a private document for the trustee to maintain and distribute wealth in accordance with the Trust document.  A Will, however, becomes a public document the moment a probate is opened with the Superior Court.  Once a Will is admitted to probate, the probate file is open for examination at the Court during all business hours.  Not only is the Will a public document, the entire Court file is open to the public and ones entire personal affairs are open for all to see.   

Are Wills Beneficial
Based on the foregoing, it would appear Wills are un-desirable.  Wills do have a purpose and for some, it is a better alternative than a Trust.  The major benefit a Will provides is the Court’s supervision of the entire administration of the estate.  As the Court supervises the entire inventory and distribution of the individuals wealth, the beneficiaries of this wealth have the comfort in knowing the final distribution was accurate and they are protected by a Court order.  If the wealth is distributed by a Trust, the Court has no involvement in the process and depending on the individuals involved, this could be a concern.

Conclusion
Ultimately, the decision to use a Will or a Trust to distribute wealth is made after close consultation with an attorney knowledgeable in estate planning.  We hope this article has been helpful in raising many of the issues involved in the process in choosing to use either a Trust or a Will.