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Will or Living Trust?

You have two basic choices for transferring your assets on your death: the will, which is the standard method, and the living trust, which is rapidly growing in popularity. If you die without either a will or a living trust, state law controls the disposition of your property. And settling your estate likely will be more troublesome — and more costly.

The primary difference between a will and a living trust is that assets placed in your living trust avoid probate at your death. Neither the will nor the living trust document, in and of itself, reduces estate taxes — though both can be drafted to do this. Whether a will or a living trust is better for you depends on many personal factors. Let’s take a closer look at each vehicle.


If you choose just a will, your estate will have to go through probate. Probate is a court-supervised process to protect the rights of creditors and beneficiaries and to ensure the orderly and timely transfer of assets. The probate process has six steps:

  1. Notification of interested parties. Most states require disclosure of the estate’s approximate value as well as the names and addresses of interested parties. These include all beneficiaries named in the will, natural heirs and creditors.
  2. Appointment of an executor. If you haven’t named an executor, the court will appoint one to oversee the estate’s liquidation and distribution.
  3. Accumulation of assets. Essentially, all assets you owned or controlled at the time of your death need to be accounted for.
  4. Payment of claims.x The type and length of notice required to establish a deadline for creditors to file their claims vary by state. If a creditor does not file its claim on time, the claim generally is barred.
  5. Filing of tax returns. This includes final income and estate taxes.
  6. Distribution of residuary estate. After the estate has paid debts and taxes, the executor can distribute the remaining assets to the beneficiaries and close the estate.

A will can be advantageous because it provides standardized procedures and court supervision. Also, the creditor claims limitation period is often shorter than for a living trust.

Living trusts

Because probate is time-consuming, potentially expensive and public, avoiding probate is a common estate planning goal. A living trust (also referred to as a revocable trust, declaration of trust or inter vivos trust) acts as a will substitute, providing instructions for the management of your assets on your death and, if funded, during your life. You will still also need to have a short will, often referred to as a "pour over" will.

How does a living trust work? You transfer assets into a trust for your own benefit during your lifetime. You can serve as trustee or select a professional trustee. You completely avoid probate only if all of your assets are in the living trust when you die, or your assets are held in a manner that allows them to pass automatically by operation of law (for example, a joint bank account). The pour over will can specify how assets you didn’t transfer to your living trust during your life will be transferred at death.

Essentially, you retain the same control you had before you established the trust. Whether or not you serve as trustee, you retain the right to revoke the trust and appoint and remove trustees. If you name a professional trustee to manage trust assets, you can require the trustee to consult with you before buying or selling assets. The trust does not need to file an income tax return until after you die. Instead, you pay the tax on any income the trust earns as if you had never created the trust.

A living trust offers additional benefits. First, unlike probate, your assets are not exposed to public record. Besides keeping your affairs private, this makes it more difficult for anyone to challenge the disposition of your estate. Second, a living trust can serve as a vehicle for managing your financial assets if you become mentally incapacitated or disabled. A properly drawn living trust avoids embarrassing guardianship proceedings and related costs, and it offers greater protection and control than a durable power of attorney because the trustee can manage trust assets for your benefit.

Who should draw up your will or living trust?

A lawyer! Don’t try to do it yourself. Estate law is much too complicated. You should seek competent legal advice before finalizing your estate plan. While you may want to use your financial advisor to formulate your estate plan, wills and trusts are legal documents. Only an attorney who specializes in estate matters should draft them.

Selecting an executor or trustee

Whether you choose a will or a living trust, you also need to select someone to administer the disposition of your estate — an executor or personal representative and, if you have a living trust, a trustee. An individual, such as a family member, a friend or a professional advisor, or an institution, such as a bank or trust company, can serve in these capacities. (See Planning Tip 3.) Many people name both an individual and an institution to leverage their collective expertise.

What does the executor or personal representative do? He or she serves after your death and has several major responsibilities, including:

  • Administering your estate and distributing the assets to your beneficiaries,
  • Making certain tax decisions,
  • Paying any estate debts or expenses,
  • Ensuring all life insurance and retirement plan benefits are received, and
  • Filing the necessary tax returns and paying the appropriate federal and state taxes.

Whatever your choice, make sure the executor, personal representative or trustee is willing to serve. Also consider paying a reasonable fee for the services. The job isn’t easy, and not everyone will want or accept the responsibility. Provide for an alternate in case your first choice is unable or unwilling to perform. Naming a spouse, child or other relative to act as executor is common, and he or she certainly can hire any professional assistance needed.

Finally, make sure the executor, personal representative or trustee doesn’t have a conflict of interest. For example, think twice about choosing an individual who owns part of your business, a second spouse or children from a prior marriage. A co-owner’s personal goals regarding the business may differ from those of your family, and the desires of a stepparent and stepchildren may conflict.

Selecting a guardian for your children

If you have minor children, perhaps the most important element of your estate plan doesn’t involve your assets. Rather, it involves who will be your children’s guardian. Of course, the well-being of your children is your priority, but there are some financial issues to consider:

  • Will the guardian be capable of managing your children’s assets?
  • Will the guardian be financially strong? If not, consider compensation.
  • Will the guardian’s home accommodate your children?
  • How will the guardian determine your children’s living costs?

If you prefer, you can name separate guardians for your child and his or her assets. Taking the time to name a guardian or guardians now ensures your children will be cared for as you wish if you die while they are still minors.

SOURCE: Lisa Golshani

Fundamental Questions

Because estate planning is not just about reducing taxes but also about making sure your assets are distributed as you wish both now and after you’re gone, you need to consider three questions before you begin your estate planning.

  1. Who should inherit your assets?

If you are married, before you can decide who should inherit your assets, you must consider marital rights. States have different laws designed to protect surviving spouses. If you die without a will or living trust, state law will dictate how much passes to your spouse. Even with a will or living trust, if you provide less for your spouse than state law deems appropriate, the law will allow the survivor to elect to receive the greater amount.

Once you’ve considered your spouse’s rights, ask yourself these questions:

  • Should your children share equally in your estate?
  • Do you wish to include grandchildren or others as beneficiaries?
  • Would you like to leave any assets to charity?
  1. Which assets should they inherit?

You may want to consider special questions when transferring certain types of assets. For example:

  • If you own a business, should the stock pass only to your children who are active in the business? Should you compensate the others with assets of comparable value?
  • If you own rental properties, should all beneficiaries inherit them? Do they all have the ability to manage property? What are the cash needs of each beneficiary?
  1. When and how should they inherit the assets?

To determine when and how your beneficiaries should inherit your assets, you need to focus on three factors:

  • The potential age and maturity of the beneficiaries,
  • The financial needs of you and your spouse during your lifetimes, and
  • The tax implications.

Outright bequests offer simplicity, flexibility and some tax advantages, but you have no control over what the recipient does with the assets once they are transferred. Trusts can be useful when the beneficiaries are young or immature, when your estate is large, and for tax planning reasons. They also can provide the professional asset management capabilities an individual beneficiary lacks.

SOURCE: Lisa Golshani

Estate Planning Basics

When you hear the phrase "estate planning," the first thought that comes to mind may be taxes. But estate planning is about more than just reducing taxes. It’s about ensuring your assets are distributed according to your wishes. That’s why, even with the estate tax reduction (and eventual repeal in 2010) under the 2001 tax act, estate planning is still critical. In addition, estate taxes still pose a threat with respect to wealth available to transfer to the next generation. Remember, the "sunset" provision means that in 2011 the estate tax will return to where it stood before the 2001 tax act, unless Congress takes further action to change the law.

In addition, the act includes other provisions that increase the complexity of estate planning, such as repeal of the generation-skipping transfer (GST) tax (in 2010, with reinstatement in 2011); reduction in the top gift tax rate but no repeal of the gift tax; increases in GST and estate tax exemptions; and repeal of the step-up in income tax basis at death.

As a result, estate planning is more important than ever — without proper planning, estate taxes may still claim a large share of what you’ve spent a lifetime building.

This [article] will help you start preparing a plan to reduce your estate taxes. And if you already have a plan in place, it will show you how to make the adjustments necessary to take advantage of these changes and suggest strategies you currently may not be employing. We begin in this first [post] by offering you an overview of basic estate planning principles. Then we start discussing estate tax saving strategies.

Certainly this [article] is no replacement for professional financial, tax and legal advice. Because of the complexities and issues created by the 2001 tax act, Congress is likely to make further estate tax law changes that could affect the issues discussed here — or your estate plan. In addition, many states have now "decoupled" their death taxes from the federal estate tax, so that state taxes may be due upon your death even if no federal estate tax is due. Be sure to get professional advice before implementing any estate planning strategies.

SOURCE: Lisa Golshani

The Importance of Estate Planning

It is important for every person to have a proper estate plan in place, but, for a number of reasons, people often have no estate plan at all or, if they have one, it is inadequate.  A proper estate plan should allow you to control your property while you are alive and well, take care of yourself and your loved ones if you become disabled, and then at your death allow your property to go to those you want, when you want, and in the way you want, while saving as many tax dollars, court costs and professional fees as you can.

If you make no plans at all, then you will die “intestate.”   State statutes exist for those who die intestate, and the “decedent’s” property is distributed according to the dictates of these statutes.  Obviously, dying intestate means that the decedent has no control over who gets his/her property or how the property is distributed.  The decedent’s property may be divided up among people the decedent did not intend.   Or, even if property does go to those that the decedent  intended, they may receive the property in amounts or in ways that the decedent did not want.

For those who do have estate plans, their estate plans may not be adequate because their plans are fixated only on death taxes and the distribution of property at death.  Proper estate planning is much more than just death and tax planning.   Proper estate planning also includes life planning for one’s self and one’s loved ones. This does not mean that death and tax planning are not critical components of a proper estate plan, but they should not make up the plan’s entire focus. 

Many people plan their estates using a last will and testament (“will”).  A will can be drafted to minimize the effect of death taxes on your estate and to eventually distribute your property to your beneficiaries.  However, the major shortcomings of a will are that it requires probate administration, compromises privacy, and has no usefulness during life.

Once there is a death, for it to have any effect, the will must be filed with a court and undergo formal court proceedings called “probate administration.”   The administration of a will is handled by a personal representative, who is the person or entity appointed in the will and approved by a court to carry out the tasks of winding up the decedent’s affairs, collecting all of the decedent’s property, paying claims and expenses, and then distributing the remaining property to the beneficiaries named in the will. 

There are several disadvantages to probate administration.  Probate administration can take from many months to several years to complete.  Added to the delay of probate is the cost of probate.  Probate administration is a legal proceeding, and like all legal proceedings, the estate will incur attorney fees and court costs. If one dies owning real estate in more than one state, then the will must be probated not only in the state where the decedent last resided, but also in each state where the decedent owned real estate (“ancillary probate”), thereby adding to the delay, complexity and cost of probate.     Probate administration is open to the public, and anyone may examine the court records to learn about the contents of the will, the property owned by the decedent, the decedent’s beneficiaries and what they inherit, and the decedent’s last debts.

A much more efficient and cost effective alternative to a “will based estate plan” is a “trust based estate plan” using a revocable living trust.   A trust based estate plan is not suitable for everyone, but for many estates a trust offers great advantages.

A revocable living trust is an arrangement between the person who creates the trust (called a grantor, settlor or trustmaker) and a trustee who holds legal title to all of the property that is put into the trust. The trustee follows the directions put in the trust agreement by the trustmaker and administers the trust property for the benefit of the trust’s beneficiary / beneficiaries.   Revocable living trusts normally start out with the trustmaker, trustee, and beneficiary all being the same person.  A husband and a wife can create a joint revocable living trust, and thus serve together as the trustmakers, trustees, and beneficiaries. 

During the life of the trustmaker, the trust can be amended or revoked at any time and property can be freely put in and taken out of the trust at the discretion of the trustmaker.  Therefore, a revocable living trust allows a person to keep complete control of his property while alive and well.

Unlike a will, a living trust can perform a critical lifetime function: it can provide a plan for care upon a trustmaker’s incapacity.  When a revocable living trust is created, the trustmaker can choose his/her successor trustees.  A spouse or other family members, close friends or trusted advisers can be chosen as successor trustees.  When the trustmaker becomes incapacitated, the person selected as the successor trustee takes over the administration of the trust and begins administering the trust property for the benefit of the incapacitated trustmaker and his/her dependents.  There is no need to open a guardianship for the purpose handling the trustmaker’s financial affairs.    The trust is private, and no one other than the trustee and the trust beneficiaries need know about the terms of the trust or the property held by the trust.

In contrast, a will provides no assistance in incapacity planning.   A guardianship often becomes necessary for the handling of the incapacitated person’s financial affairs.  Guardianship proceedings are a form of probate proceedings and can be thought of as “living probate”.  A petition to open a guardianship is filed with a court.  Notices are sent by the court to the nearest relatives and a hearing is held before a judge for the purpose of appointing the guardian.  The judge decides who is the appropriate guardian and may order the guardian to post a bond.  After the guardian is appointed, the guardian must file an inventory of all of the incapacitated person’s property with the court and then must administer the guardian’s financial affairs with the court’s supervision and approval.  Guardianships can last for a substantial time and may become very expensive.

With a revocable living trust, when the trustmaker dies, there is no need for probate administration for trust property.  Like in the case of a trustmaker’s incapacity, the successor trustee takes over the administration of the trust property and, without court involvement, winds up the deceased trustmaker’s affairs, pays his/her debts and taxes, and distributes the property according to the directions left by the trustmaker in his/her trust.    There is no need for ancillary probate for real estate owned by a trust.   There is no requirement to file the trust with any court, thereby allowing the trust to remain private.  Privacy can be maintained as to what property is in the trust, who the beneficiaries are, and what the beneficiaries receive by way of property distributions.  A trust can be designed not only to minimize death taxes but to allow the  trustmaker to give his/her property to those he/she wants, when he/she wants, and in the way he/she wants.

The revocable living trust is powerful for both life and death planning.