Do I Need a Trust or Is a Will Enough?

Written by Jim Worthington on August 19, 2018

Many clients call and ask if they need a revocable or living trust? Will it avoid probate, which many believe is a universally bad experience? Will it save taxes? Not everyone needs a revocable trust. Who does?

A revocable trust is not a tax-saving device. Because you retain control over it during your lifetime and can make changes just like you could change a will, it is part of your estate for income, inheritance, and estate taxes. There are, however, non-tax reasons to have a revocable trust. You need a revocable trust if you have a particular desire to avoid probate or for privacy.

When do you need to avoid probate?

You should avoid probate if you live in a state where probate is expensive or drawn out. Fortunately, Kentucky is not such a state. When federal estate taxes are not involved, probate can often be completed in nine months or less. And, the probate court is generally not an active player in the process. It only gets involved if the personal representative and beneficiaries can’t get along. And, frankly, it’s not a bad thing to have its involvement then.

You should also avoid probate if you own property in more than one state. That could require probate in both places. And even if the other state—where what we call the ancillary probate would take place—has easy probate laws, it is a hassle for your family to have to go through probate in two places.

When do you need extra privacy?

Avoiding probate is a good idea for clients who want privacy because probate involves making your will a public record. So, anyone who wants to go to the courthouse or look it up online can read what it says. Two situations that call for privacy are common.

One is when your dipositive provisions, i.e., the ones that say who gets your estate after you pass, are not equal and outright to your beneficiaries. You might be leaving less to one child or you might have a special needs child, i.e., one who can’t receive an outright inheritance without losing government benefits. You don’t necessarily want to advertise these facts to everyone.

Another circumstance calling for privacy is when you don’t want to make the value of your estate a public record. During the probate process, the personal representative files an inventory of your assets. If you are the proverbial millionaire next door, you may not want people to know that you were quite successful and amassed a sizable estate. You may not want people to know how much your family is inheriting. Or, you may be a small business owner and not want the value of that business to be in the public record. The probate inventory includes the fair market value of each asset so the personal representative would have to place a value on your business. Competitors or potential purchasers might find that useful.

How does a revocable trust help?

If properly set up and funded during lifetime, a revocable trust can avoid probate. Establishing the trust will keep your dispositive provisions, discussed above, private. But, it won’t keep the value of your estate or of particular assets private. To do that, you must fund the trust during your lifetime by transferring assets to it while you are alive and competent.

• For real property, this means having a lawyer prepare a deed and recording it. If you own property in more than one state, this will often mean hiring a lawyer in the other state to prepare the deed as state bars don’t allow lawyers to provide legal services under a state’s laws unless licensed there. If you don’t have a lawyer in the other state, your lawyer should be able to refer you to someone.
• For business interests, this means an assignment or stock transfer. You may want your business lawyer to prepare this, and you should make your accountant aware of what you are doing so it can be reflected on tax returns.
• For tangible personal property, this means something along the lines of a bill of sale. However, some tangible personal property, e.g., vehicles and boats, are titled, and you will have to go to a government office to change their title.

Why do I still need a will if I have a revocable trust?

Clients with a revocable trust still need what’s called a pourover will. It’s very hard to transfer every asset into the trust. Experienced lawyers know that clients forget about the small savings account in their hometown or the CD they purchased to help a banker friend.

Even clients who are 100% thorough in funding their revocable trusts may receive a check from a nursing home or assisted living facility made payable to the estate. A pourover will does exactly what its name implies: it pours those assets over into the trust.

Why doesn’t everybody avoid probate, just in case these things happen?

There are actually some advantages to probate. One is that in Kentucky, probate limits the time during which a person’s creditors can make claims to six months after appointment of the personal representative. If there is no probate, creditors have until two years after death to make claims. Where an asset sale is planned soon after death, the proceeds may have to be held in escrow for two years if there is no probate.

Summary

So, avoiding probate is not for everyone. You should have an open conversation with an experienced estate planning lawyer to determine what is best for you.