Estate Planning: Should I Have a Trust or Will?

You have likely already understood from my previous articles that estate planning, or “death planning” is not a substitute for proactive asset protection or “life planning,” yet both are vital components of any serious financial plan. Estate planning controls what happens after you die, asset protection planning makes sure the assets are protected against outside sources of loss and are actually available for the estate plan to distribute in the way you planned.

An estate plan in some form is always necessary unless you want your estate to pass through “operation of law” or probate which involves the long, uncertain, public and sometimes expensive process at your death with a stranger (the courts) deciding who gets everything you leave behind. This process often leads to heartache, delay, and additional stress for those you leave behind, especially if they need the assets to sustain the family or if, more commonly than you imagine, family members fight over what you leave behind.

A simple will comes into effect at your death, controls the distribution of your assets (who gets what and when), and names the executor of your estate - the person you chose to be in charge and carry out your wishes. A will is the most basic form of estate planning and still requires the estate and its assets to go through the probate process, meaning that there will be an expense and delay in transferring assets at your death. A will is also public, meaning that a record of exactly what you left and to whom is available. In our view, it is best suited for those with limited and simple assets, few or no heirs, and those with no minor children, dependents or pets that require specific care and guardianship guidance.

A Revocable Living Trust (RLT), on the other hand, includes all the elements of a will, is established, and can take title to a certain assets during your lifetime when you (and your spouse) can actively manage and change it. The RLT avoids probate of nearly your entire estate, passes assets privately with little or no public record, and typically includes a variety of sophisticated estate tax avoidance measures. This last issue is especially important given that many seasoned estate planners are preparing their clients for an expected estate tax regime that takes 55 percent of everything a married couple leaves over $1 million when the current $5 million estate tax exemption expires in 2013. Why? Because we simply believe that the U.S. Government is going to need more, not less, of your money going forward given current economic conditions.

The RLT also names and has specific guidelines for the trustees of your estate, appoints specific guardians for your children and dependents and can retain wealth and “sprinkle” income off the principal to your heirs. This helps to preserve the assets that you leave behind so that they last as long as possible without depleting the principal of your estate and helps to avoid the common pitfalls of new or large amounts of wealth being delivered to those who may not have the maturity and experience to handle it effectively, aka trust fund baby syndrome.

Estate planning tools also allow a countless variety of sophisticated directives including what you want done if you have some sort of incapacitation condition like an illness or mental issue, typically referred to as “living will” and “health care power of attorney” provisions. Most of you reading this as medical professionals or administrators are infinitely familiar with these provisions, having helped patients to complete them, but would be amazed by the number of people in your business who neglect this aspect of their own planning.

Wills and trusts are merely the tip of the iceberg and form the core foundation of most common estate plans. There are countless specialized tools available like Irrevocable Life Insurance Trusts (ILIT) that help protect the cash value of life insurance as an asset and which remove the proceeds of the policy from your taxable estate and Special Needs Trusts which help protect children or other family members with mental or physical disabilities from having their inheritance completely consumed by medical and other care expenses before any public assistance kicks in.

Now is the time to consider what fits your family.

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