Often when I meet with a new client to prepare an estate plan the client walks in the door believing that she needs a trust. When asked why she would like a trust, the response is often to avoid probate because she has heard that probate is very expensive. However, when the pros and cons of a trust are discussed with the client, in most cases the client decides that a will is a more suiting instrument. Unless there are specific reasons to create a trust, most of the time a well-drafted will is sufficient. So who wins in the battle of Will vs Trust?
What is Probate?
At its most basic level, probate is the process by which a decedent’s estate is administered. When assets of the decedent are titled in her name (i.e. a home, a car, bank accounts, etc.) probate is needed to change the ownership of those assets. If a decedent dies with no assets titled in her name, there will typically be no need to probate her estate (most of the time a court is not needed to transfer ownership of a couch, TV, and DVD collection). Also, there are various types of assets (life insurance being the most common) that are able to transfer at death without the need of probate.
Cost to Probate an Estate
Like any legal matter involving attorneys and the court system, there is a cost associated with the probate of an estate. However, the cost in Idaho to probate an estate is much more reasonable than in some other states. For instance, in California an attorney representing the personal representative of an estate is compensated in an amount based on the total value of the estate. Therefore, if a decedent’s estate is high-value, the cost to probate that estate will likewise be high. This leaves many with the impression that probate is something to be avoided at all costs.
In Idaho, the fee you pay your attorney is not governed by statute, but is a contractual matter between you and the attorney. Whether that fee structure is based on an hourly rate, or some other agreement, the attorney’s compensation will not be directly related to the value of the estate, although high value estates may naturally require more time and attention than a low-value estate. Generally the cost to probate an estate in Idaho is very reasonable, especially when considering what is required to implement an estate plan to avoid probate, and the unfortunate reality that such plans often fail.
How Can a Trust Avoid Probate?
First it is important to know what a trust is. Surprisingly, the IRS (of all possible sources) provides a simple and easy to follow definition of a trust: “a trust is a relationship in which one person holds title to property, subject to an obligation to keep or use the property for the benefit of another.” The basic structure of a trust is that the legal interest and the beneficial interest of property is split, either between a single person acting in multiple capacities, or between multiple people acting in different capacities. A simple example is this: John Hancock owns a home, which is titled in his name as an individual. When John dies, that home remains titled in the name of John Hancock until a probate is initiated, at which time the title of the home will be transferred to his estate and then ultimately in some other name, depending on what is done with the home. This all requires a probate, which requires hiring and paying an attorney and cost costs. Alternatively, if John had established a trust, say the “John Hancock Living Trust,” John could have given that home to the Trust for the benefit of himself, he could have acted as Trustee of the Trust during his life time, and also designated who should act as his successor Trustee when he dies, and directed what should be done with that house when he dies. Upon the death of John, the Successor Trustee could simply do with the house what John directed, without needing to probate the estate and involve the court and the expense associated with that process.
Generally speaking, creating a trust is more expensive than drafting a will or just letting the State decided what to do with your things. But, done right, a trust can avoid the need to probate an estate. However, all too often probate is still required even if a trust has been established. To continue with the example above, imagine that some years after John purchased the starter home mentioned above, his earning potential exponentially increased and John began collecting very expensive cars. As John begins purchasing these cars he forgets to purchase them with assets of his Trust and also forgets to have them titled in the name of the Trust. If John passes away with the same home (title is held by the Trust) and numerous expensive cars titled in his name personally, the result will be the need to probate the estate to deal with the cars, even though there was a trust established intended to avoid probate. This may sound unlikely, but it can easily happen.
A Trust Should Have a Purpose
A trust can be beneficial in many different circumstances. There are numerous trust structures to minimize tax liability. There are trusts to care for individuals with disabilities receiving public support and assistance that otherwise may become ineligible if the same funds were given to them directly. There are trusts designed to finance a child’s education. There are trusts to support adult children who can’t be trusted to manage their own finances. There are even trusts to ensure compliance with Federal gun regulations and provide flexibility in the ownership and use of those guns. As long as there is a purpose for creating a trust, it can be very valuable and beneficial. However, creating a trust just for the sake of creating a trust is probably not worth the expense and hassle.
If you have developed the resolve to meet with an attorney and discuss an estate plan, whether you’re leaning towards one side or another as far as a will vs trust, you have already taken a step in the right direction. Our attorneys can help you determine what type of estate plan is right for you.