Comparing Wills Versus Trusts

Wills and trusts serve similar purposes but accomplish those purposes in different ways.  A Will and Testament is a more traditional way of handling one’s estate and is generally easy to create.  You could draft up a bona fide legal document outlining your wishes upon death, or you could produce something less formal that could still hold up legally.  In an extreme case, you could even produce a will orally to witnesses and some states will accept that as legally binding.  This is called a noncupative will.  Trusts, however, are always accompanied by a bona fide legal document requiring a notary to be considered valid.  The reason for this is that a trust document represents more than one’s wishes, it actually creates a legal entity that can own property.

There are pros and cons to each, so let’s review what those are.

Pros to Wills

  • Generally easy to create
  • You can name an executor to your estate to handle the distribution of your assets
  • You can leave specific instructions of how to distribute your assets
  • Can be amended or replaced at anytime

Cons to Wills

  • Wills can be invalidated if certain legal procedures aren’t observed (e.g., noncupative wills aren’t recognized by most states and certain criteria must be met to be validated in states where they are recognized)
  • Wills are public record so anyone can see it once enacted in probate court (Some examples of public wills are that of Jacqueline Kennedy Onassis and Elvis Presley)
  • Wills are required to go through probate court, and is usually expensive

Wills are pretty straightforward.  It’s best to create a will using an attorney so that it will hold up in probate court and accomplish your desires.  Wills can also be created with a template if you choose.  You should name an executor to carry out your wishes, in fact, you should name alternative executors should the named predecease you or become incapacitated.  Then you’ll simply give instructions of how you want the assets in your estate to be handled.  Keep in mind that an executor not only distributes assets, but also oversee your estate taxation and closes out any outstanding debts you may have.  Once uncle Sam gets his cut and all creditors are satisfied, then assets can be distributed.  Upon death, your executor will apply for probate where a judge will review your last will and testament.  If the will is in compliance with state laws, then the judge will issue a letter of testamentary.  This document is what institutions will ask for in order to retitle your assets into your estate.  Once your assets are titled to your estate, then the executor can carry out the directions of your will.

Pros to Trusts

  • Avoids probate
  • Transferring assets is easily accomplished by the trustee (similar role of an executor)
  • You can name your successor trustee (generally you name yourself the trustee while living)
  • Can be easily amended (assuming a revocable living trust)
  • Can handle complex strategies involving insurance to reduce tax liabilities.

Cons to Trusts

  • Requires the oversight of an attorney to create or amend and can be much more costly
  • Certain estate planning strategies involving trusts can become quite complex and hard to understand
  • Your successor trustee has a lot of power over assets and you must completely trust them to follow the directions provided in the trust document.  Often people will establish a third party trust company to act as your trustee, which again, can become quite expensive

Trusts aren’t quite so straightforward.  In fact, there are many different types of trusts that I won’t go into.  For the purposes of this post, I’m speaking of a revocable living trust.  While it is possible to create a trust from a template, I wouldn’t recommend it.  It’s important to utilize an attorney to make sure that your directions are written in the proper legal language and correct procedures are followed.  With a trust, there are three entities involved, the Grantor(s), the Trustee(s), and the beneficiary(ies).  Usually, you will name yourself all three entities while living.  The trust will contain instructions on how to handle assets while living, then there will be separate instructions on how to handle assets upon death.  The Grantor is the one placing the assets into the trust, so that is always you.  When you do this, the assets no longer belong to you, the individual, but they now belong to this new legal entity that you’ve created.  The trustee is the one who is responsible handling the trust’s assets, so it makes sense to name yourself trustee while living.  Finally, the beneficiary is the one who benefits from the income or use of the assets, again that’s you while living.  But upon death, you obviously can no longer act as trustee, so your successor trustee will provide your death certificate to institutions and usually will fill out a form requesting to be made the trustee where they will have access to handle the assets.  Also, the trust becomes irrevocable.  Then depending on your instructions, the trustee will either keep the trust intact, perhaps to provide for a special needs child, or they will distribute the trust assets and dissolve the trust.

Regarding taxation, assets in a revocable living trust is still considered the property of the grantor despite that technically it isn’t.  The reason for this is because the grantor maintains control over the assets and there is considered the “beneficial ownership”, even if the beneficiary is someone else like a charity.  There are ways to reduce taxation with irrevocable trusts in conjunction with insurance policies, but that is beyond the scope of this post and will be covered in a later post.  The point of bringing this up is that trust assets are taxed by your personal tax return while living, then when you die the trustee must file a tax return for the trust for as long as the trust continues to remain intact.

So what’s a physician to do?  Generally, physicians will benefit more from a trust because you have greater potential to accumulate assets, whether it be in the form of stocks and bonds, real estate, ownership in businesses, or whatever else.  Because your needs upon death become more complex, it requires a more complex tool to handle those needs.  Imagine asking an executor to bring a large, complex estate to a probate judge.  Not only would it be very time consuming to work through the handling of those assets with the judge, it costs a lot.  Generally around 3 percent of the estate.  So the greater the estate, the greater the cost.

I recommend that whatever stage in life you’re in, it’s a good idea to have a trust in place.  However, the older you get and the more assets you accumulate, the more important it becomes to put a trust in place.

So what do you think?  Which strategy best fits your situation and why?