Estate Planning Review: Choosing a Will or a Trust

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by Doug Dehn
Winter 2007 In Brief Newsletter

Should I have a Will or a Trust? This is a common client interview starting point. The answer is not always simple. Discussion ensues as to what the pros and cons are as to Wills and Revocable Living Trusts (RLTs).

Wills may simply name your beneficiaries, personal representative and alternates and contain other basic terms. A will may also contain a Contingent Trust for the benefit of children or grandchildren, a Disclaimer Trust for estate tax planning purposes, or both.

An RLT, designed to avoid probate and insure privacy, also designates beneficiaries, successor trustees and alternates. An RLT may also contain a Contingent Trust, A Disclaimer Trust or both.

Because there are relatively simple steps with a Will, most people decide to use Wills and not RLT’s. However, RLTs do have very legitimate purposes. First , if a client owns property in more than one state, the use of an RLT will avoid an ancillary (extra) probate in that second or third state. Most states have probate systems that are more complicated, time consuming and expensive than Minnesota. The avoidance of an ancillary probate is one of the primary reasons for using RLTs. Secondly, using an RLT ensure privacy. Some clients prefer RLTs to avoid the possibility of the public knowing about his or her affairs. Thirdly, an RLT quite often names the person setting up the trust (Grantor or Settlor) and another, typically a spouse or an adult child, as a co-trustee. Successor trustees are named to handle the affairs of the incapacitated Grantor and upon the death of the Grantor. The trust simply keeps running after incapacity or death.

Using a Will means that the Will, after death, would be filed with the Probate Court and administered under the Probate Court system. Some clients believe that a Will eliminates probate, but this is not true. The Probate Courts are public and technically anyone can review a probate file.

Compared to most states, Minnesota has quite a simple probate system. Most probates are handled on an informal basis, meaning that an Application and the original Will are filed with the court and the personal representative is appointed, all without a court appearance. An Inventory is filed showing what assets the decedent had on hand in his or her own name. Of course, there are many types of properties that are not probate in nature, namely joint tenancy property and other contractual , beneficiary-driven assets, including life insurance, pay-on-death accounts, transfer-on-death accounts, IRA’s 401(k)s, 403(b)s, etc.

Most married couples own their assets in both names as joint tenants. Upon the first death, the survivor files a death certificate with the holder of the joint or other non=probate asset. Real estate is cleared by filing an Affidavit of Survivor-ship, with an attached certified copy of the Death Certificate, with the County offices. Most married couples who have Wills do not use the Will on the first death, but upon the second death. The key is this, what did the decadent own in his or her name alone at the time of death? Beneficiary-driven assets simply have alternate beneficiaries.

RLTs do not work unless they are properly funded. This means that most assets must be transferred or deeded into the RLT, which acts like a small company to hold the assets. Beneficiary-driven assets are not typically put into an RLT. Some clients do not like the idea of transferring their assets and living withing this trust entity the rest of their lives where trust and trustee issues are dealt with. To others, the extra work is not a concern. Trusts always cost more than Wills initially, but can save time and some expense later.

Whether Wills or RLTs are used, statutory, durable Powers of Attorney (POA) should be entered into. These revocable POA’s allow a named party and successors to handle the affairs of the client during his or her lifetime.

Both Wills and RLTs may contain contingent trusts for the benefit of their children or grandchildren. A typical situation for a contingent trust could be parents who do not want the children (or grandchildren) to take full inheritance through a Will or RLT at age 18 (for fear of the purchase of the “red Corvette,” etc.). Some parents wish to have some control of an inheritance after age 18 such as to provide for post-secondary education, with two or three later distributions. Trusts are fine tuned to the specific wishes of a client. Some parents want their beneficiary-driven assets, including insurance, to be funneled through this plan so that the children do not take directly all funds at age 18. However, a 401(k) or traditional IRA are not usually funneled through the contingent trust plan due to the income tax benefit of stretching the payout over the term of the child beneficiary’s lifetime.

In summary, whether a client elects to use a Will or a Revocable Living Trust, it is important to plan for the inevitable. It is satisfying for me to see my clients breathe that “sigh of relief” when they finally finish that long put-off, but extremely important, responsibility.

About William F. Huefner

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