Estate Planning with a Will or Trust: Avoiding Probate and More

One might summarize the goals of estate planning in two ways:

1. To see that your money and property is placed into the hands of the people and causes that you care about (and kept out of everyone else’s).

2. To provide for yourself if you become disabled.

In order to achieve these goals, there are two mechanisms you can use: a will and a trust. Since there is some overlap between the two, and since both are often used in conjunction with one another, a different way to term this might be a will-based estate plan, and a trust-based estate plan. This article will examine each of the two estate-planning goals separately and analyze how effective a will-based estate plan and a trust-based estate plan are at addressing each of them.

GOAL # 1:  To See that Your Money and Property is Placed Securely and Efficiently into the Hands of the People and Causes you Care About (and Kept out of Everyone Else’s).

For most of us, the reason we work hard our whole life is to provide not only for ourselves but for those we love. In life and in death, we want our property allocated for the purpose of securing a provision for the people and causes we care about. And since it is our property—not someone else’s—many would probably agree that they want that property distributed to precisely whom they desire, with no one else allowed to have a piece of it. That means that creditors, lawyers, the government, or anyone we dislike or distrust should not be able to get their hands on what we leave behind.

The Problem with Probate

You may have heard the term “probate” before. Probate is from a Latin word meaning to prove. The government has a process in place to make the recipients of an inheritance prove that they are, in fact, the intended beneficiaries. Conceptually, this is a good thing for the reasons we described above. If there were no probate process, many people who did not plan properly could have their estate taken by fraudulent individuals. 

The problem, however, is that the process is both lengthy—on average no less than six months—and costly, as attorneys charge hourly fees to see the process along and the court charges filing fees. Another disadvantage of probate court is that it is public. A public and lengthy affair can invite unwanted claims to the inheritance, discord among family members, and can alert creditors. Therefore, the probate process cuts against goal number one of estate planning. Your money and properly are not placed efficiently into the hands of those you love. In fact, it is terribly inefficient. And it is not kept out of everyone else’s hands, as lawyers and the court will take a significant piece of the estate through fees and court costs.

Probate with a Will-Based Estate Plan versus a Trust-Based Estate Plan

A will-based estate plan has a distinct disadvantage in that it must be probated in court in the manner referred to above. On the other hand, a trust-based estate plan, if the trust is funded properly during the lifetime of the grantor (usually a simple and inexpensive-if-not-free process), will not need to be probated in court. That is not to say that there are no mechanisms to make sure that unintended people are not wrongfully claiming what is meant for the intended beneficiaries. Trustees are appointed with specific instructions that they must adhere to or else subject themselves to civil liability. The process of making sure that you have given what you want to whom you want the way you want is much more simplified, efficient, and inexpensive.

The Case of the Suddenly-Rich Youth

Some children mature quickly and at a relatively young age they can handle affairs responsibly and wisely. Most, however, take time to get there. A court will hold a minor’s inheritance for them until they reach the age of majority (for a deeper look at this process, read our article, “Planning for Minor Children in the Event of Incapacity or Death”). After they reach 18, or in some states 21, that child takes possession of their inheritance outright. For a child who is not-yet-responsible enough to manage finance, this can thwart goal number one, because the money is placed in the hands of those that you love, but not securely. Even a small inheritance can be valuable in the expensive and demanding world we find ourselves in, and that value is lost if an unprepared young man or woman squanders it with friends or on expensive-but-temporary items.

Case closed: Solving for the Suddenly-Rich Youth with a Will-Based or Trust-Based Estate Plan

A simple will does not solve this problem. It will assure that the money is left to the intended beneficiary after the probate court affirms it, but the situation described above will still arise. A more complex will-based estate plan can account for this with something called a testamentary trust. This is a one-time trust embedded in a will that lays out terms for when a beneficiary can inherit. 

A trust-based estate plan can solve this problem with the simple terms of the trust and the trustee charged with effecting those terms. A trust can state that a beneficiary may not receive until a certain age. If the trust maker wants to be even more precise, they can add terms that allow the beneficiary to seek distributions for healthcare, education, maintenance or support until they reach a certain age and then inherit outright. This would allow, say, an 18-year-old to receive part of his or her inheritance to pay for college or buy a car to get to work before they were old enough to receive more. Additionally, the terms of the trust may allow for the beneficiary to take a portion at a certain age, a second portion at a later age, and a third portion at an even later age. This allows the beneficiary to learn from their past experience with how they handled (or mishandled) the first distribution.

Another disadvantage of a will-based estate plan pertains to the goal of “giving what you want when you want.” A trust, if it is structured properly, can be added to or taken from during your life. Trustees can be removed or added, as can beneficiaries. All of these processes can be made with minor edits to the original document. A will, on the other hand, is changeable only by the re-execution of an entirely new document.

Keeping Money and Property out of the Wrong Hands

The list of potential actors that could seek the money you set aside for your loved one is almost endless. To name a few, there are creditors looking to satisfy a debt, people looking to get a payment by filing a lawsuit, or even spouses of our children that we do not believe have the best intentions.

Ensuring Inheritance is not Gifted to the Undeserving with a Will-Based or Trust Based Estate Plan

A will-based estate plan has a disadvantage that cuts against the number one goal of estate planning: To see that your money and property is placed only into the hands of the people that you care about and not into the hands of anyone else. This is because a will distributes the inheritance to the beneficiary outright, in one lump sum. The owner of the property is then that beneficiary. If there is a credit claim against that beneficiary, that property that you left to them will become subject to that claim. Likewise, if the beneficiary is sued for whatever reason, the litigating party will be able to sue for judgment on the inherited property. 

But creditors and lawyers are not the only ones looking for a lunch on our dime. Though we always hope that our son or daughter marries the right one, the unfortunate reality is that they may end up marrying someone who you do not see eye-to-eye with and whose intentions you are wary of. Additionally, with divorce rates at an all-time-high, even a marriage that seems stable now may end up with the couple parting ways. In such an event, an in-law that you did not choose to leave your money or property to may very well have a claim to it.

A will-based estate plan cannot solve for these scenarios, but a trust-based estate plan absolutely can. If you feel your beneficiary might be subject to these circumstances, you can see your property is securely passed to them by putting the property in the name of the trust and having a skilled lawyer draft what is called a spendthrift provision. A spendthrift provision protects the trust property from creditors. Further, by virtue of the fact that the property is in the name of the trust, in the event of a divorce, a spouse would not be able to claim part of it in a judgement.

Here, another advantage of the trust becomes apparent. Namely, that you can alter a trust as much as you want while you are alive assuming it is drafted properly. This means not only can you add or remove property from the trust, but you can change beneficiaries or trustees. If circumstances change—as they almost always do—during your life, you can alter your trust with little effort to reflect those changes. This is simply not the case with a will. A will is, by definition, effective only upon death. Then and only then do its terms come into effect.

GOAL #2: To Provide for Yourself if You Become Disabled

Here, it is important to distinguish between incapacity end-of-life planning—that is, planning for one’s own medical care in the event of incapacitation preceding death—and incapacity life planning. This section is about incapacity life planning, for information on incapacity end-of-life planning, read our article titled, “Advanced Healthcare Directives: Avoiding the ‘Lifetime Probate’.”

Adult Guardianship or Conservatorship: A Government Take-Over of Your Life

Apart from one’s health, it is reasonable to have concerns over what should happen to our finances in the event we become disabled. As with the above discussion on probate, the government has a system in place to manage one’s personal and financial affairs if he or she becomes mentally or physically disabled to the point of incapacity. That system is called guardianship or conservatorship (the former pertaining to medical decisions and financial decisions, the latter only to financial decisions). This is the same court-administered system discussed in our article on estate planning for those with minor children found [here], but in this case it is for the benefit of an incapacitated adult.

Both a guardianship and a conservatorship involve an interested party petitioning the court, effectively requesting that the court place the disabled adult in a guardianship or place his or her finances in a conservatorship. It is completely common in these proceedings for family members to have to testify under oath as to why they believe the adult and his or finances need to be supervised by the court. This can be humiliating for the adult for whom the petition is filed and can be a source of severe hardship for the family. It is also costly, as the fees for the guardian and the conservator as well as the court costs come out of the estate.

Avoiding Guardianship and Conservatorship with a Will-Based or Trust-Based Estate Plan.

A trust-based estate plan can avoid the need for a guardianship or a conservatorship. First and foremost, there can be language in the trust defining disability. In fact, one can establish a panel of trusted individuals and medical professionals who can vote to determine if the trust maker has in fact been rendered disabled as defined in the trust. If disability is indeed established, the assets in a funded trust would be managed by the successor trustee, eliminating the need for a conservatorship. With a durable Power of Attorney to supplement this and afford the possessor of it the ability to deal with unfunded property and miscellaneous items like mail and tax returns, the need for a guardianship to secure the affairs of an incapacitated person is rendered moot.

It is not the case that a will-based estate plan cannot have mechanisms to avoid an adult guardianship or conservatorship in the case of disability. However, it is unequivocally true that a trust-based estate plan is more comprehensive. In a will-based estate plan, the aforementioned durable power of attorney is the entirety of the disability plan. Without this, the remedy is a guardianship. But durable Powers of Attorney are much better suited to handling minor affairs. Financial institutions and title companies may look askance at someone who brings a durable Power of Attorney to move, alter, or otherwise manage a large asset. Think about this: you walk into a bank and seek to make a withdrawal from an account with a name on it other than yours, and you show the teller a piece of paper, likely signed several years ago, that says you have the authority to do so. It is much more effective when the asset is owned by the trust and the trustee is charged with its management.

For these reasons, a will-based or trust-based estate plan are clearly the best choice to achieve the above two estate planning goals.  While there are clearly advantages to a trust-based estate plan, having a will in place is much better than having nothing at all. Many people delay setting up their will-based or trust-based estate plan for various reasons but setting aside the time will pay dividends for your loved ones down the road.