Living Trusts Versus Wills

Reasonable minds may differ and reasonable people may disagree about any given issue. The issue of whether living trusts are better than probate is not universally settled. In my opinion, whether a person should create and establish a Living Trust, or a Last Will and Testament depends on a variety of factors, including (but not limited to) the marital status of the person, the size of the estate, whether there is a need to minimize estate taxes, the person’s family dynamics, the need to provide for children in a particular way, the financial sophistication level of the person, and, most importantly, the goals or objectives the person is trying to accomplish. In this newsletter, I will compare the living trust process with the probate process.

WHAT IS PROBATE?

Probate is the court supervised process of transferring legal title of assets from a deceased person to living people. It is necessary when a person dies holding real property or bank accounts or other assets in the person’s own name. If the person dies without a Will (“intestate”), the laws of the State of California direct where the person’s assets go under its laws on intestate succession. If the deceased person has a valid Will (“testate”) the assets will pass according to the provisions for the named beneficiaries stated in the Will. Further discussion in this newsletter assumes there is a Will.

The probate process involves asking the court to approve the decedent’s Will as valid and to appoint an Executor. The Executor has the legal authority to access the decedent’s accounts and property, and is charged with the responsibility of gathering, under the Executor’s control, all of the decedent’s assets. The Executor must also notify all known creditors of the decedent requesting the creditors to file proper claims against the decedent’s estate. The Executor files a detailed inventory with the court after the assets have been appraised. After all the decedent’s debts, expenses, and taxes have been properly paid or secured, and all the duties and responsibilities of the Executor have been completed, the Executor prepares an accounting of all the transactions during probate and requests the court to approve the accounting and authorize the Executor to distribute the decedent’s property to his or her beneficiaries.

REASONS TO AVOID PROBATE

There are three main reasons to avoid the probate process: 1) it is time consuming, 2) it is public, and 3) it is expensive.

Probate is time consuming. In Los Angeles County, even the simplest of probates take at least one year from the date of death to complete. Part of the reason for this is that due to budget cuts, there have been court closures, making fewer courtrooms available for probate cases. There are also prescribed periods of time for notice, creditor claims, inventory appraisals, and the like which must be fulfilled. Sometimes probates take longer than a year, depending on the circumstances.

Probate is public. Every document filed with the probate court is open to the public for inspection by anyone. There are heir hunters, realtors, investors, creditors, and predators who spend each day looking to see who has died, whether or not they have living relatives, and how much they were worth. The names, ages, and addresses of minor children may also made public.

Probate is expensive. The attorney and the Executor are each entitled to a fee equal to a percentage of the assets going through probate. The percentage is calculated at fair market value without any offsetting mortgage and is on a sliding scale. Consider a $500,000 home with a $400,000 mortgage as the only asset in a probate case. The equity in the home is $100,000. The probate estate will lose $13,000 in fees to the attorney and $13,000 to the Executor. That is in addition to the $1,000 or so paid for court and other fees. In this example, 27% of the equity in the home is paid out in fees and costs during probate.

WHAT IS A LIVING TRUST?

A trust is a declaration or agreement you make with yourself to hold your assets in a particular way, namely, in trust. The trust identifies the person who sets up the trust, called the “Settlor” or “Trustor”, and the person who will manage the trust assets during the term of the trust, called the “Trustee”. The Settlor is usually also the initial Trustee so that he or she can carry on with managing the assets in the same way as before the trust was created.

Living trusts, also known as “revocable living trusts” or “revocable inter-vivos trusts”, are created during a person’s lifetime. The terms of such a trust enable the person to revoke, amend, or modify the trust throughout the person’s lifetime.

Creating a living trust is the first step in avoiding probate. But a trust document, alone, is not enough to avoid probate. The most important step of establishing a living trust is ensuring that the trust is funded with all of the person’s assets. That means, each and every asset owned by the person (with the exception of retirement plans) must be re-titled in the name of the living trust. Failure to take this step during a person’s lifetime will result in a probate of each asset held in the person’s name at the date of the person’s death.

If all of a person’s assets are titled in the name of the person’s living trust, then, when the person dies, those assets will not be subject to probate because they are not “owned” by the person but rather by the living trust.

Administration of a living trust at the death of the Settlor is done privately, with the Successor Trustee and the estate lawyer, and can often be accomplished within a matter of months. The cost of trust administration is usually a negotiated fee between the Successor Trustee and the estate attorney, rather than as a percentage of the trust assets. Establishing and administering a living trust generally can be done for a fraction of the cost of probate for the same assets.

SO, WHICH IS BETTER?

It depends on the circumstances. I am biased in favor of living trusts because I believe avoiding probate is in the client’s best interest based on cost and time alone. However, there are circumstances in which the creation and establishment of a trust is not necessary.