In estate planning, the decision between using a will or a revocable trust is not a one-size-fits-all answer. It depends on your individual circumstances, the state you live in, and your goals. This article will delve into the advantages and disadvantages of wills and revocable trusts, and how to choose the right vehicle for your estate planning needs.
Revocable Trusts: When Do They Make Sense?
Revocable trusts can be advantageous in certain situations and states. Both wills and revocable trusts can include the same dispositive provisions, meaning they can dictate who gets what when you pass away. Revocable trusts make sense in the following scenarios:
- In states where probating a will is expensive or difficult: Examples include Delaware, where the court fee is 1.75% of the estate, and California, where dealing with the court can be challenging.
- To avoid restrictions on who may serve as an executor or personal representative: In Florida, for instance, a personal representative must be a relative or a Florida resident.
- To avoid state income taxes on estates with large amounts of income: Different states have varying rules for taxing trusts, and using a revocable trust can help minimize or avoid state income taxes.
- In cases where the testator has unknown or distant relatives: In New York, for example, the probate process is more complicated when there are no relatives closer than a cousin, and the law requires notification and a diligent search for unknown heirs.
- To maintain privacy: If you want to keep certain bequests or business succession plans private, a revocable trust can help achieve that goal.
However, most of the time, a revocable trust may not be necessary.
Advantages of a Will vs. a Revocable Trust
A will offers more flexibility, as it is easier to change and can adapt to your evolving asset portfolio. On the other hand, a revocable trust requires constant monitoring to ensure that new assets are titled correctly. Moreover, the initial cost of setting up a revocable trust can be higher than that of a will.
Making changes to a revocable trust is also more costly, as most attorneys will want to restate the entire trust, while changing a will is typically less expensive. One hidden cost of a revocable trust is the potential for hiring a poor attorney, which can result in costly mistakes and legal fees.
Cons of a Revocable Trust
The primary disadvantage of a revocable trust is the risk of assets not being retitled properly. Additionally, trust litigation can be more costly than dealing with issues related to a will. It can take two to three times the legal fees to fix a broken trust in probate court than to resolve issues with a will.
Comparing the Ease of Changing a Will vs. a Trust
A will is easier to change than a trust because you only need to execute a new will. In contrast, changing a trust requires revoking and restating the trust using the specific language found in the trust document or defunding the existing trust and funding a new one. This process involves double-checking assets, ensuring correct titling, and verifying beneficiary designations.
Tax Benefits of Revocable Trusts in Specific Scenarios
In some cases, using a revocable trust can lead to significant tax savings. For example, there was an estate where the decedent lived in one state, and using a revocable trust saved the estate a substantial amount of money. The decedent was the largest shareholder in a personal holding company created from the sale of a corporation’s assets. After the decedent’s death, the corporation distributed its accumulated earnings to make an S election, allowing shareholders to invest the money as they desired. The Federal tax rate on dividends was lower in the year of the distribution, but it was set to increase the following year, so there was a benefit to making the distribution earlier.
Like most states, the decedent’s state of residence taxes the estate of a resident. However, this state does not tax trusts created by its residents unless there is a trustee in the state. In this case, the trustees were in two different states. One state does not tax trusts created by nonresidents, and the other state only taxes trusts administered within its borders. By administering the trust in the state that does not tax trusts created by nonresidents, the trustees managed to avoid state income taxes on a considerable amount of dividend income. This example illustrates the potential tax advantages of using a revocable trust in specific scenarios.
Conclusion: Making the Right Choice for Your Estate Plan
The decision between a will and a revocable trust depends on your individual circumstances, goals, and the state you live in. To make the right choice, consult with an experienced estate planning attorney who can help you evaluate your options.
As a general rule of thumb, a revocable trust may be more suitable if you are getting up in years and want to wrap up your affairs neatly for your loved ones.