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Trust vs. Will – Which is right for you?

One of the most fundamental questions I help clients answer is what should serve as the foundation of their estate plan: a Will or a Trust? It’s true that in Florida, you generally have two options regarding what operates as the cornerstone of your estate plan: (1) a Last Will & Testament vs. (2) a Revocable “Living” Trust (sometimes also referred to as a “Family Trust”). The primary advantage of having a Trust vs. a Will is that assets titled in the Trust avoid probate upon your death. Typically, estate planning attorneys charge more to establish a Trust-based plan vs. a Will-based plan, primarily because a Trust-based plan requires more work and expertise, but also because of the economic value the client receives by avoiding probate for their intended beneficiaries. For most of my clients, spending the extra money now to avoid probate (and hefty price tag that goes with it) for their beneficiaries later makes the most economic sense for the following reasons:

  • Probate can take a long time.

In Florida, we don’t use the term “Executor” – instead, we use the term “Personal Representative” (or “PR” for short). In Florida, the PR in a probate proceeding must wait for the court to issue “Letters of Administration” before the PR can access and deal with estate assets. Exactly how long does it take for the probate to get started? This will depend largely upon the particular county where the probate proceeding is filed. Generally, probate is required to be filed in the county where the deceased person resided at the time of his or her death. You should expect probate courts in larger counties like Hillsborough and Miami-Dade to take more time to process Letters of Administration than in medium size counties like Pinellas, Sarasota, and Manatee, which generally issue Letters of Administration within three to four weeks after the Petition for Administration and related court pleadings to open the estate are filed. In summary, you are looking at about a month just to get the probate proceeding started.

Once Letters of Administration are issued, the PR can begin to do the heavy lifting, including liquidating bank accounts and other property, including preparing and listing real estate for sale. Around this same time, the PR also establishes an estate checking account with its own Employer Identification Number issued by the IRS and begins notifying “reasonably ascertainable” creditors with a special type of legal notice called a “Notice to Creditors” (the creditor notification process is discussed in more detail, below). Ultimately, you should expect a formal probate proceeding to take about eight to twelve months total, although some estates take much longer than this, especially if there are extenuating circumstances, such as:

  • Complex creditor issues (especially involving the IRS)
  • Tenant-occupied real property
  • An operating business that is part of the estate
  • Beneficiary infighting
  • Disputes regarding the validity of the decedent’s Last Will & Testament
  • Disputes regarding the interpretation of the decedent’s Last Will & Testament

To avoid the uncertainty and time delays inherent in most probate proceedings, most of my clients choose to use a Revocable Trust as the main vehicle of their estate plan. This is because in a trust administration, the Successor Trustee does not need any court approval to begin liquidating and distributing the deceased person’s assets, dealing with tenants, or operating a business. Put another way, the Successor Trustee named in the client’s Trust can access trust assets immediately without court supervision or interference.

  • Probate is creditor friendly.

In probate proceedings, the PR is required to notify “reasonably ascertainable” creditors and publish a legal “Notice to Creditors” in the local newspaper, thereby providing an open forum for potential creditors to make claims against the estate for a mandatory 90-day period known as the “creditor claims period.” In contrast, the Trustee of a Revocable Trust has no affirmative duty to notify creditors regarding the nature and value of trust assets. A creditor seeking to access trust assets would need to file a separate lawsuit in order to subpoena this information. In short, the Trustee of a Revocable Living Trust has much more leverage in dealing and negotiating with potential creditors after someone dies. Compare this to a PR in a probate proceeding, who actually owes a fiduciary duty to estate creditors who are entitled to be paid before any beneficiaries can receive their inheritance.

  • Probate is expensive.

Both probate and trust administration involve fees and costs. In a probate administration, both the PR and the attorney for the PR can take a 3% commission on the first $1 million of assets, and then a 2.5% commission on assets between $1-3 million, with the percentage commission gradually decreasing as probate asset values increase.

On the other hand, there are no statutory percentage fee entitlements in trust administration; rather Florida law provides that Trustees are entitled to “reasonable compensation under the circumstances.” Most Corporate Trustees charge between 1.25-1.75% annually to manage trust assets, which can serve as a benchmark for how much individual Trustees should charge, but always depending upon the amount and complexity of the work involved in the particular trust administration.

Ideal Clients for Wills

Despite being given the above information, some of my clients nonetheless choose to rely on Wills as the foundation of their estate plan. Typical reasons for choosing a Will instead of a Trust include:

  • Most (or all) of the client’s assets will pass outside of the Will by virtue of joint ownership.
    • For example, Linda owns her primary residence as joint tenants with right of survivorship with her son, Loyd, who lives with her and serves as her caregiver. When Linda dies, Loyd will inherit her primary residence automatically by operation of law by virtue of the joint tenancy. The transition of ownership will happen outside of Linda’s Will and thus avoid probate.
  • Most (or all) of the client’s assets will pass outside of the Will via beneficiary designation.
    • For example, Linda has named Loyd as “pay-on-death” (“POD”) beneficiary on all of her bank accounts. When Linda dies, Loyd will be able to claim the funds in Linda’s accounts as POD beneficiary by presenting Linda’s death certificate at the bank. The transition of ownership will happen by operation of law by virtue of the beneficiary designations, and thus outside of Linda’s Will, thus avoiding probate.
  • The client would rather save money now and have their beneficiaries pay for the probate later.
    • Some clients feel that their beneficiaries should “foot the bill” on the probate so they can spend less on estate planning during their lifetimes. These clients usually have beneficiaries who are either charitable organization or well-adjusted adults with no addiction or other special issues.

For clients whose assets will pass to well-adjusted adult beneficiaries via joint ownership or beneficiary designation upon death, having a relatively simple Last Will & Testament as a “back-up” measure may be all that is recommended. Similarly, clients who devise the bulk of their assets to charity may not mind that there is a “price tag” associated with the transition of assets to the charity at death. The most important thing is that the estate planning attorney provides the client with the relevant information required to make a fully informed and educated decision.

Ideal Clients for Trusts

However, not all clients can rely upon Wills, joint ownership, or beneficiary designations to avoid probate without risking major harm to their intended beneficiaries. Additionally, not all assets lend themselves to having a “pay-on-death” beneficiary – the most notable being business entities and in many cases, real estate. In addition to the time delays and costs associated with probate noted above, other compelling reasons to utilize a Family Trust instead of a Will or beneficiary designations include:

  • Beneficiaries with special needs who receive government benefits such as Medicaid and may require a Supplemental Needs Trust (also known as a Special Needs Trust) to ensure their benefits are not forfeited when they receive an inheritance.
  • Minor beneficiaries (under age 18) who otherwise would require guardianship court intervention to inherit assets.
  • Beneficiaries who are bad with money management (even if over 18).
  • Beneficiaries with addiction issues (e.g., legal and illegal drugs, alcohol, or gambling).
  • Beneficiaries in a rocky marriage (and thus prone to divorce).
  • Beneficiaries prone to litigation (e.g., high risk professions, including medicine; bankruptcy).
  • Running a business, which typically requires immediate access to the company’s operating account, payroll, etc. to avoid a “fire sale” upon the death of the owner.
  • Owning real property (real estate) in more than one state may subject you to probate in every state where you own property (not just Florida).
  • For rental real estate, delays in dealing with tenants upon the landlord’s death often cause problems with collecting rent and re-negotiating leases, or simply having access to funds to make repairs landlords typically are obligated to make.

In choosing whether to have a Will vs. a Trust as the cornerstone of your estate plan, you should consider whether any of the factors noted above apply to you. While it is always appropriate for the estate planning attorney to make a recommendation, even a strong recommendation, one way or the other, the attorney’s main job is to provide you with the information required to make the best decision based on your unique estate planning goals and budget.

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