At Standen Law, our goal is to work with you to establish a plan that works for you and your family. Unfortunately, much of the law of wills and trusts is buried in legal terminology that most people (including many attorneys) don't understand. In our series "The Basics," we offer plain-language explanations of many of the key considerations estate planning clients should make.
One of the significant decisions clients face in estate planning is whether to use a will or a revocable living trust (with a simple “pour-over” will). In this article, we explain the differences between these tools and the costs and benefits of each. We begin by explaining what each device is, then review the most important pros and cons of each, and finally offer some preliminary observations about how you can choose whether a revocable living trust is the right option for you.
What is a will?
A will is a written set of instructions dictating who gets what following the will-writer’s death. The will also names a personal representative, or executor, of the will-writer’s estate (the "estate" is simply all the stuff the will-writer owned at the time of death). The will may also name guardians to look after the will-writer’s minor children. After the will-writer dies, the will is filed with a court known as the probate court, and the court almost always appoints the personal representative chosen by the will-writer. The personal representative then begins to follow the will’s instructions and fulfill the additional obligations under Maine law. Thus, a will only gets put to work once the will-writer dies, and nearly every will must be administered with supervision by a probate court.
One important concept to understand about wills and the probate process is that not all of your property will be “probate” assets that are governed by the terms of your will. For example, most people have retirement accounts in which they have designated beneficiaries who will receive the accounts on the account-holder’s death. These accounts generally pass by contract and not by will – even if your will directs what happens to them. Also, many people own various accounts and property "jointly" between spouses. These assets generally pass immediately to the surviving joint owner(s), without involvement of any will or the probate court.
As discussed further below, if you transfer assets during your life into a revocable living trust, then those assets will not be governed by your will and therefore will not be “probate” assets –reducing or eliminating the role of the probate court.
What is a revocable living trust?
The simplest way to think of a trust is as a sheet of paper that can own property under the direction and control of a person named in the trust as “trustee.” Once the trust is drafted, you – in your new, fancy role of “trustee” – will then transfer (or “re-title”) into the trust’s name any property you wish to be owned in the name of the trust. This would include many types of savings and investment accounts, real estate, high-value collectibles, and various other items.
Similar to a will, a revocable living trust includes instructions for passing your property – now held in the name of the trust –upon your death to the trust’s beneficiaries. While the will does this using a personal representative, distributions from a revocable living trust are made by someone called a trustee. Because a trust holds your assets while you are alive, the revocable living trust is almost always set up so that you as trust-maker are the initial trustee. This gives you control over all of the assets in the trust, just as you would have had if the assets had been titled in your name. The trust also names a “successor trustee” to succeed you when you die or, if you choose, when you become incapacitated. This successor trustee fills a role similar to that of “personal representative” or “executor” under a will, distributing property as instructed by the trust.
Like a will, a revocable living trust can also name guardians for minor children, custodians of the money inherited by minor children or adult children with special needs, and provisions for how money and property will be distributed over the course of a trust beneficiary’s lifetime. The tool can also be used flexibly to address a number of additional scenarios and contingencies.
One important step in making a revocable living trust work is funding the trust properly. This means that you must re-title any property that will be subject to the trust, including deeding your home into the trust and re-titling into the trust’s name certain checking, savings, or investment accounts. You should consult with your attorney before taking any of these actions, as there are some account types (e.g., traditional IRAs, everyday checking accounts, and others) that you likely would not want to have in the trust. Importantly, if you die before having funded the trust, probate will be necessary to transfer all of the assets into your trust, so much of the value of the trust is lost.
Finally, barring very unusual circumstances, you will almost always execute a will in addition to a revocable living trust. This is often called a "pour-over" will, and its role is simply to allow your personal representative to transfer into your trust any assets that were not properly titled under the trust's name at the time of your death.
Pros and Cons of the Revocable Living Trust
Most attorneys outside of Maine say that the biggest advantage of a revocable living trust is avoiding or minimizing the role of the probate court, which can be costly and creates a public record concerning ownership of the assets that pass through your probate estate. The probate process in Maine is not as burdensome as it is in many states, however, so it is hard to say that avoiding probate in Maine justifies the up-front costs of revocable trusts in every instance.
There are advantages to revocable living trusts in specific circumstances. If you own property in multiple states, for example, it is almost uniformly advisable to obtain a revocable living trust to avoid having to undergo probate (and hire an attorney)in two or more states. Likewise, if you own a small business or have assets that you would like to protect from creditors, titling those assets in a revocable living trust can provide an additional level of protection. Revocable living trusts can also offer significant asset protection in various scenarios, including second marriages and certain situations in which there is a concern over elder fraud.
There are some disadvantages to revocable living trusts. The immediate disadvantage is the up-front cost of setting one up. On average, a client can expect to pay about two times as much for a revocable living trust, in part because of the additional work required to fund the trust. Also, the immediate logistical challenge of funding the trust can be an unwanted burden for some clients. It is not uncommon to encounter complications with the funding process, and clients who attempt to do all funding without an attorney’s support can easily make mistakes by re-titling the wrong accounts (e.g., IRAs) or assets (e.g., personal vehicles) into the trust. Though less common today, some banks and mortgage servicers will complicate matters by incorrectly concluding that the transfer of mortgaged real estate into a revocable living trust triggers an early payment requirement. While this can usually be corrected, doing so costs time and money. Finally, clients should take care to update insurance policies to show that the trust is the insured entity rather than the client. This list is not comprehensive, and you should certainly consult with your attorney if you have set up a trust and are in the process of re-titling your property into its name.
As this article should demonstrate, whether to plan using a revocable living trust or a will depends on your unique circumstances. The attorneys at Standen Law will be happy to discuss your options in greater detail, so please schedule a consultation today.