Wills and Trusts: Which Will You Trust for Your Estate Planning?

Several years ago, I was interested in doing some volunteer work, and a friend hooked me up with a Chinese-American woman, Lin, who needed an English tutor. I’ve not only become good friends with her, but I now help out with many of her personal affairs—finances, health insurance issues, etc.

Lin, now 81, has recently become concerned that perhaps she should have a living trust instead of the will she created a few years ago.

So, I’ve been doing a bit of research, and thought I’d pass along what I’ve learned. It’s a complex subject, and each individual or couple’s situation will determine which option is best for them. But just to get you started understanding the basics, I’ve included a comparison of the two at the end of the column.

Why Choose a Living Trust?

I also spoke with Santa Cruz Attorney Timothy J. Morgan, who very kindly and generously spent some time with me discussing certain aspects of trusts and wills.

Morgan said the primary reasons to create a trust are: 1) to avoid probate, 2) to insure privacy and 3) to have a speedy resolution.

In regards to 1), probate is the legal process of passing on assets to heirs. The process can sometimes be lengthy and costly.

In regards to 2), a trust is always private; a will is made public during probate.

In regards to 3), as mentioned above, a will, which requires probate, can take some time to process. In a trust, the transfer of assets to heirs happens quickly.

Understanding that each case is unique, I asked Morgan if there was a rule of thumb or a monetary threshold to help people decide whether they should go with a trust or a will.

He said that in California, if your total net worth is less than $100,000, you can avoid probate, so a will may be appropriate for you. However, if the $100,000 includes real estate, you should create a trust, because the real estate portion of your assets will go into probate. (The courts do not consider real estate valued less than $25,000.)

Whew. It is complicated and nuanced!

Morgan went on to say that many people hold real estate in joint tenancy and think that will protect the real estate from probate. Indeed, I read this often in my research. However, there are some cases where probate would still occur, he said. For instance, if both tenants (presumably spouses) die together, the real estate is left unprotected. Or, if one tenant dies before the other, the joint tenancy is dissolved, again opening up the real estate to probate upon the second tenant’s death.

“People can’t assume what they want to happen or wish to happen will happen,” Morgan said.

Morgan said when he creates a trust, he includes a Durable Power of Attorney and an Advanced Health Care Directive. He explained that a trust acts as a substitute for a will, and a “pour-over will” is also prepared, which covers any future assets not included in the trust.

Tax Consequences

He also wanted to mention two important tax laws passed by Congress at the end of 2010.

The new estate tax law says that up to $5 million can be passed onto heirs without incurring any tax liability.

And a new law of portability between spouses says up to $5 million from one spouse’s assets can be “inherited” by the surviving spouse without tax liability. This means when the surviving spouse dies, a maximum of $10 million can be passed onto heirs with no tax liability. (That's $5 million “inherited” by the surviving spouse plus $5 million from the surviving spouse’s additional assets.)

The new portability law “allows a lot of flexibility for people who want to pass their estate onto children,” Morgan said.

Do You Need a Lawyer?

I saw a lot of “do-it-yourself” estate planning forms and kits while researching, and I asked Morgan if he would recommend that people consult a lawyer before completing a trust or will.

He said he would. “I’ve seen plenty of mistakes done with automated forms,” he explained. “If someone is extremely careful, it can work out fine. But if there are mistakes, it could take major hoops to fix them, costing a lot more in the long-run.”

Once I help Lin understand a bit more about estate planning, she wants to consult a lawyer, with me in tow. Personally, I think it’s a good decision. There are so many details to know and understand, and an estate planning attorney has the expertise to get the trust or will prepared properly.

Morgan was recommended to me by another attorney, and I appreciate how incredibly helpful he was. For other recommendations, and for those on a low income, you can contact Senior Citizens Legal Services or the Lawyer Referral Service of Santa Cruz County.

Comparison: Trust vs. Will

The following summarizes characteristics of a trust and a will.

A Living Trust:          

Pros:

    • Avoids the expense and delay of probate proceedings, which can take up to three years to complete and cost 10 percent of the value of your estate.

    • Immediately transfers management of your property if you become incapacitated either physically or mentally.

    • Protects your privacy.

    • Lets you name someone to manage trust property for young beneficiaries.

    • Does not require a lawyer to distribute your estate.

Cons:

    • Can require a lot of initial paperwork and can be expensive.

    • Requires you to transfer ownership of all the property you wish to place in the trust; you may need to revise title documents.

    • May make it difficult to refinance property that is in your trust.

    • Does not let you designate a guardian for any minor children.

A Will:

Pros:          

    • Is much simpler and less expensive to create.

    • Lets you name a guardian for your minor children.

    • Does not require any transference of property.

Cons:

    • Requires probate, which can be costly and slow.

    • Becomes public upon probate.

    • Allows you to appoint an executor; however, probate lawyers usually handle the actual distribution of the estate.

    • Does not provide for transfer of management of your property if you become physically or mentally incapacitated.