When is it more important to use a living trust as opposed to a will? This is a question many clients, and advisors, ask themselves. Discussed below is an attempt to clarify these murky waters.
First, let’s make sure we understand that the answer to the above question may vary depending on which state you are from. For example, use of living trusts may be more widespread in certain states such as Florida or California. For our purposes, we will focus on New York. However, keep in mind that even for lawyers in the same state there is significant difference of opinion. Remember the old saying: “if you ask ten lawyers for their opinions you are bound to get at least fifteen strongly-held, well-reasoned views.” With that backdrop in mind, here are some thoughts:
We think most people do estate planning for one or more of the following reasons:
Minimize taxes. Usually, but not always, that means estate taxes. With a $5 million federal estate tax exemption, few people need to worry very much about federal estate taxes these days. However, the New York State estate tax exemption is only $1 million. Moreover, without Congressional action, the federal estate tax exemption is scheduled to return to the $1 million level in 2013. Even if your estate is large enough for you to worry about estate taxation, there is no inherent tax benefit in living trusts. A living trust, in and of itself, does not result in any estate tax savings. Bottom line: estate tax concerns simply do not drive the trust vs. will question.
Probate avoidance. To avoid probate, or (more broadly) to simplify matters for their heirs or successors. Unless you have an extremely complex situation, New York’s probate process is not nearly as complicated or expensive as you might think. If there is family discord, however, that can drive up the cost. Also, if you own real estate in more than one state, your will must be probated in each of those states (unless you create a living trust or other probate-avoidance mechanism for some or all of those properties). That can drive the expense up considerably, and certainly complicates things for your family.
Control. Many people wish to control how their assets are used after their death. This can be accomplished either in a living trust or a will. However, if you use a will, you will have to have a testamentary trust in your will in order to maintain control over the assets. These types of trusts are very useful if one of your beneficiaries has special needs, may be getting a divorce, or has creditor problems. A trust will allow you to protect those assets when compared to an outright disposition in a will.
Your own incapacity. Many clients worry about their own incapacity. This is why you should sign a power of attorney. It is one of the most important documents in your estate plan. Without a properly executed power of attorney, your family may be forced to incur the expense of a guardianship proceeding in the event you become incapacitated during your lifetime. However, some banks and financial institutions still are reluctant to honor valid powers of attorney for a variety of reasons. While this should not happen in many cases, the reality is that it does. With a living trust, you could potentially avoid some of the problems others face with powers of attorneys since your assets will be re-titled into the name of the trust. Conversely, a will does not take effect until you die. Thus, it will not help you in the event you have problems getting your power of attorney honored.
Based on the foregoing, the answer to our question is unclear for most people. There are a handful of our clients for whom the trust is unquestionably the right technique, and another handful for which the trust is not harmful but simply too much legal help for a problem that doesn’t exist. Keep in mind that even if a trust is right for you, you still need a will to cover the distribution of any assets that are not placed in trust. Most of our clients fit into the large middle ground — it would not be foolish of them to opt for a living trust, and it would not be foolish of them to have a will and not put their assets in trust.
Again, we caution you against putting too much stock in these descriptions or applying them to your situation without good legal counsel. Look over this list of considerations and think about what they say about your estate planning needs. Share them with your own lawyer and ask for a thoughtful, critical evaluation. Your family and heirs will be glad you did.
Bernard A. Krooks, Esq., is a founding partner of Littman Krooks LLP and has been named a “New York Super Lawyer” every year since 2006. He has been honored as one of the Best Lawyers in New York and America since 2006. A past president of NAELA, SNA, a CELA®, and a fellow of ACTEC.