THE STRAIGHT SCOOP: TRUSTS VS. WILLS

There has been much publicity in recent years of a technique to avoid probate (and all the cost and time associated with probate). Many readers have probably seen advertisements in the newspaper or on television, or have been solicited to attend a free seminar on the benefits of this technique. The technique appears under various names in these advertisements including, the “Living Trust,” the “Revocable Living Trust,” the “Revocable Lifetime Trust,” and other similar names. The technical name for such a device is known in legal parlance as the “revocable inter vivos trust.”

For purposes of this article, the “trust” device referred to by these many names will be called simply a “trust,” although there are many types of trusts which do not fit into the category of the type of trust commonly referred to by the names mentioned above. The most common use of the type of trust referred to in the advertisements is as an alternative to a will by a married couple or an individual. A married couple or an individual can convey virtually all of their proper into the trust and make provisions for the disposition of the property upon their death. At death, there is no usually no need for a court proceeding (as there is with a will) to give legal effect to the provisions of the trust instrument which govern the transfer of the property to children or whomever.

A will, on the other hand, requires a court proceeding to give its terms legal effect. In short, a will is only worth the paper it is written on, unless it is “admitted to probate” in a court proceeding.

A trust can be a useful estate planning tool, and can be the perfect tool for a given individual or couple, depending on their circumstances. But, be aware of somewhat misleading advertisements which tend to make a trust sound better than it is. Many times advertisements will imply that you can avoid or reduce taxes through the use of a trust, and that trusts are less susceptible to attack than a will. Also touted as benefits of a trust are the privacy of a trust (since usually there is no court proceeding, which would be public record) and, of course the avoidance of probate.

While a trust usually avoids the necessity of a court proceeding, anyone who prepares trusts (or who has had a trust prepared for them) knows that along with the trust instrument, a will is almost always prepared. This will is usually termed a “pour-over” will because the beneficiary of the will is usually the trust. This “pour-over” will serves the function of distributing any property which was inadvertently left out of the conveyances to the trust, or any property which was acquired after the creation of the trust which was not then conveyed to the trust. As noted above, any will must be probated to have any legal effect. Therefore, if any of the individual’s estate was left out of the trust, a probate of the “pour-over” will will be required. In addition, a trust, just like a will is subject to being contested. A contest of a trust will be just as time-consuming and costly as a contest of a will.

Trusts are also touted as being less likely to be subject to contest. The reason given for this is that presumably a trust has been in existence and functioning while the creator of the trust was alive. The argument usually is that since the trust was in existence and functioning for a number of years, it should not suddenly be found to be invalid upon the death of the creator of the trust (which is the time when most contests occur). However, the same is really true for a will. A will which was created many years prior to death, while the individual is in good health and mind, is not nearly as susceptible to contest as a will written on one’s death bed which disinherits the person’s children and leaves the entire estate to the person’s maid. If a trust has an unusual disposition (e.g., the effect of the trust is to disinherit children) it is just a likely to be the subject of a contest as a will would be.

Avoidance of probate itself (even when a will is uncontested) is usually given as reason to utilize the trust device. However, many attorneys who advertise trusts charge anywhere from $1,500.00 on up to create the trust instrument and all the conveyances to the trust (which usually involves preparing and filing deeds of real estate, changing the names on bank accounts and titles to vehicles, etc.) Local attorneys usually charge much much less for the preparation of a will, and much less for an uncontested probate. Moreover, the fee for the trust will be incurred at a time when many people need the money. The fee for the probate will be incurred by the estate after death. In addition, the fees for a probate proceeding will be deductible for estate tax purposes as an estate administration expense. The creation of a trust is considered a personal legal expense and is not deductible.

We have addressed the characteristics, benefits and some of the myths of the revocable inter vivos trust and compared the use of this estate planning device to that of the more commonly used will. We will continue to explore and compare the trust device to the will and attempt to continue to dispel some of the myths.

One of the most prevalent myths about trusts is that the use of a trust instead of a will will help avoid estate taxes. As a general rule, a revocable trust does not save or avoid any taxes which cannot be avoided with a will. Whether an individual’s estate is the subject of a court proceeding or not in no way changes the taxability of a person’s estate. As a general rule, any property in which a deceased person had an ownership interest at the time of death will be included in the deceased person’s gross estate for estate tax purposes. If a deceased person created a revocable trust and retained any power to revoke the trust or control the property within the trust, the property held in the trust will have to be included in the gross estate of the person for estate tax purposes.

As noted previously, the type of trust addressed in this article is one to which a person or married couple conveys property, but retains the ability to use the property, control the property and even revoke the trust if they so desire. The value of property held in such a trust will have to be included, for estate tax purposes, in the gross estate of the person(s) who created the trust. In this regard, there is no estate tax savings by virtue of using the trust as opposed to disposing of property by will.

If, upon a person’s death, property passes under the terms of a trust to a charitable organization, the value of the property passing to such charity may be excluded when arriving at the estate value for estate tax purposes. However, the same result occurs when property is left to a charity under the terms of a will.

A married couple can shelter a certain amount of their combined estate from estate taxes through judicious estate planning. One of the most common techniques involves utilizing trusts so that each spouse’s lifetime exclusion  for federal estate and gift taxes (an amount set by the Internal Revenue Code which will eventually reach $1,000,000 per individual by 2004) is utilized fully in conjunction with the unlimited marital deduction for federal estate taxes. It is not, however, necessary to create the trusts used to implement this estate planning technique during the lifetime of the married parties. Such trusts may be created by the terms of a will after the death of one of the couple. If a married couple’s combined estate falls into this category, the couple should seek the advice of an attorney to explore this estate planning technique.

This last bit of advice is also true for people with smaller estates. For instance, current exclusion levels for the Oklahoma estate tax are much lower than the federal estate tax for lineal heirs (although the Oklahoma exclusion levels for lineal heirs are set to equal the federal exclusion levels over the next several years), and there is no exclusion if the property passes to collateral heirs (e.g., brothers, sisters, etc.). Moreover, regardless of the size of a person’s estate, it is prudent to seek the advice of an attorney regarding other estate planning needs. For instance, a married couple with minor children should certainly consider making wills which establishes trusts for their minor children and names the person or persons whom the parents would like to be guardian of their children in the event the parents were both killed in an accident.

In summary, a trust may be exactly what an individual or married couple needs for the individual’s or couple’s given situation. On the other hand, a trust may be unnecessarily complicated, expensive and unnecessary for many people’s needs. The key is for each person to get competent, professional advice regarding what is best for his or her specific needs and circumstances. Caution should be taken with regard to advertisements which promote only one method of estate planning, such as the trust. Every person’s needs must be specifically evaluated before any attorney can render an informed, professional opinion as to that person’s needs. Advertisements which try to sell only one type of estate planning tool are more than likely just that: trying to sell you something.

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