Do I Need a Will or a Trust?

As an estate planning attorney, I hear this question a lot, but a better question would be, “Do I need just a will, or should I also have a trust?”  That’s a better question because all people need a will, while some people would also benefit from a trust. 

A will is a written instrument that dictates how one’s assets are to be distributed after your death.  It does not have any legal effect until you die, and a person of sound mind can revoke or change it any time prior to death.  Upon death, all assets personally owned by you become part of your probate estate.  The assets of your probate estate are first used to pay the costs of administering your estate, your funeral bill, your final medical expenses and any outstanding debts incurred during your lifetime.  Your remaining assets are then distributed to the beneficiaries named in your will, per the written instructions provided by your will. 

A trust, on the other hand, is a written instrument created by a person, the maker or “settlor,” that provides that a named third party, a “trustee,” will manage certain of the settlor’s assets for the benefit of a beneficiary (or beneficiaries) named in the trust.  Commonly, settlors will name themselves and/or family members as beneficiaries.  Of course, the beneficiaries do not have to be family members, they could be friends, charitable organizations, or any other person or entity.  Trusts can be set up so that the settlor can revoke them at any time during his or her life, or they can be set up as irrevocable trusts, trusts that can never be changed after they are executed.  Trusts can be structured in a multitude of different ways to accomplish a wide variety of estate planning objectives. 

There can be many advantages to having your assets in a trust.  For instance, they give you greater control during your lifetime over how you distribute your assets to the people you care about.  The assets in trusts do not pass through probate, and this can simplify the administration of your estate by sheltering these assets from probate court.  Furthermore, trusts can be structured in certain ways that may help you reduce or, in some cases, eliminate estate/inheritance taxes.  Moreover, there is usually no public record of the trust assets, giving you and your family greater privacy.  Trusts can be set up to make special provisions for a child with special needs.  Trusts are ideal for providing for a child who is not good with money, as they can contain certain “spendthrift” provisions that protect the trust’s assets from a beneficiary’s creditors.  People also like to use trusts to keep assets out of the hands of their in-laws, as one can very easily draft clauses that guarantee that distributions go only to blood-relatives.  These are just a few of the many advantages trusts can provide.  The bottom line is that trusts can provide unparalleled flexibility and utility in helping you reach your estate planning goals. 

Unfortunately, trusts have some very distinct disadvantages.  First off, they are expensive to set up, and expensive to maintain.  Compared to a will, a qualified attorney can easily spend five to ten times more time drafting a trust, and this is reflected in the amount attorneys charge for drafting them.  Moreover, after the trust has been set up, there is a lot of expensive paperwork involved, as the Trustee has to file annual state and federal tax returns, and is usually required to file periodic accountings for the beneficiaries to review.  This paperwork in turn generates regular billing from the trustee, her attorney and her accountant.  Moreover, if a beneficiary is unhappy with the way the trustee is managing the trust, they can bring legal actions that the trustee will have a duty to defend, and the legal fees in these types of disputes can be astronomical.  The worst news, not surprisingly, is from the Federal Government.  If the trust earns over $12,500 in income, and this income is not distributed, that income can be taxed at a marginal rate of 37% at the Federal level.  Adding insult to injury, Connecticut will charge an additional 7% on all federally taxed trust income.  Finally, from an emotional standpoint, when a settlor places most of her assets in a trust, she gives up a great deal of autonomy over her finances, and this is especially true if the trust is irrevocable. 

Given the potential costs outlined above, when advising clients, my general rule of thumb is that the larger and more complex the estate, the more likely a client is to benefit from having at least some of their assets in a trust.  Yet, the decision about whether or not to make a trust should not be determined solely by the size of the estate, because each client has unique needs and circumstances.  In the final analysis, you will not be able to make a meaningful decision about whether to set up a trust, or what kind of trust you need, until you have sat down with your attorney, your accountant and, preferably, a competent financial advisor. 

  My advice regarding wills is much more straightforward—everyone needs one.  If you do not have a will, the estate is considered “intestate” and you will have no say in how your wealth is passed on.  Instead, the distribution of your assets is determined by the statutes, and enforced by the Probate Court.  More critically, when an estate is intestate, you have no control over who the court appoints to manage your affairs after you die.  The Probate Court could very well appoint the most incompetent and self-serving family member as administrator of your estate.  The bottom line is that the Probate Court does not know your family the way that you do, and you have the right to tell the court who should be in charge of your estate when you are gone.  Unfortunately, you forfeit that right when you die without a will. 

Many people make the mistake of thinking that they do not need a will because they have “everything in a trust.”  The problem is that no one—and I mean no one—dies with “everything in a trust.”  Trusts often do not account for the personal bank account that folks pay their day-to-day bills with.  They frequently to not include cars, boats, antique motorcycles, coin collections, fur coats, jewelry, fancy Rolex watches, royalties, shares in small businesses, undistributed inheritances from other relatives, etc.  I could go on for several pages listing valuable items that are frequently not included in the trust, but you get the point.  Those assets that are not part of the trust create a lot of loose ends that have to be tied up in Probate Court.  Moreover, while trustees can be authorized to pay funeral expenses and other final expenses, they usually look to the will for guidance, and if there is no will, that could create a lot of unnecessary confusion.  So, even if you have a trust, you need a thoughtful, up-to-date will.

So, if you do not already have one, have your attorney get started on your will today.  You needed one yesterday!  If you have a will, and your estate is of any significance, then you would do well to meet with an estate planning attorney and explore the possible benefits of setting up a Trust.