31 Jan 6 Advantages And Disadvantages Of A Will And A Revocable Living Trust
There is much debate among Texas attorneys as to whether it is better to have a Last Will and Testament or a Revocable Living Trust in estate planning. The simple answer is that it depends on the facts, your goals, the type of assets, cost concerns, potential disability issues (of both you and your beneficiaries), if real estate is owned in another state, etc. In fact, sometimes, it is best to have neither! There are numerous types of trusts created for a multitude of reasons that are beyond the scope of this article.
Wills
Most are familiar with Wills – the document which dictates how individually owned assets (without beneficiary designations) are to be distributed after death after debts are paid if the Will is determined valid in accordance with state law as determined by the court. This process is known as probate. However, that doesn’t mean that all Wills need to be probated. On the other hand, many are surprised to learn that Wills must be probated to transfer certain assets. For example, if a husband (who has children from a prior marriage) has a Will that states the homestead goes to his surviving spouse, the Will must be probated for the surviving spouse to solely own the homestead. Otherwise, the husband’s children would have an ownership interest under the laws of intestacy.
Revocable Living Trust
Although there are dozens of types of trusts, most people think of a Revocable Living Trust when they hear the term “trust”. A Revocable Living Trust is a trust that (assuming mental capacity of the grantor) can be amended, modified, or revoked during the life of the person (grantor) establishing the trust. Assets of the grantor should be funded (in other words, retitled) into the name of the trust (although sometimes the trust is funded by beneficiary designation). Some assets (i.e., retirement accounts due to income tax issues) should not be retitled to the name of the trust during the grantor’s life. Since the trust is revocable, the trustee can take assets in and out of the trust as desired. Also, no separate tax return is needed during the life of the grantor (the one who establishes the trust).
Six Advantages of a Will:
- Less expensive up-front costs.
It is generally less expensive to create a Will than a trust.
- If your spouse is your beneficiary and is disabled at the time of your death and your spouse seeks Medicaid to pay for long-term care costs.
Under the long-term care Medicaid rules (which helps for long-term care costs such as nursing home and at-home care), a special needs trust for a surviving spouse can only be established by a Will (not in a Revocable Living Trust). So, if the surviving spouse doesn’t have adequate long-term care insurance or has inadequate income to pay for care, then often planning to preserve resources for the surviving spouse (and beneficiaries) is best through a Will. However, some who plan in advance create a Medicaid Asset Protection Trust (which is different than a Revocable Living Trust) to protect assets if either spouse needs long-term care.
- If you need a guardian for a child of yours who is a minor.
Although other documents can be used to name a guardian for a child of yours who is a minor, often it is best to name a guardian in a Will.
- Employee Stock Options.
Sometimes employee stock options can be transferred only by a Will.
- Certain PLLC membership interests cannot be owned by a trust.
The ownership (membership) interests of certain professional limited liability corporations cannot be owned by a trust. For example, a professional limited liability corporation for an accounting firm, law firm, medical practice, etc., the membership interest can only be owned by members of the same profession.
- Texas has a simplified probate process.
If the Will was properly prepared and the original Will can be located and if there is no expectation of a contest, then generally the probate process is not difficult – you just have to follow all the laws.
Six Disadvantages of a Will (which are trust advantages):
- Probate – delay, costs, and must follow the laws.
Although probate is generally simple in Texas, you must follow the laws. So, for example, if the original Will was lost, the court will presume it was destroyed and additional proof if needed. Another example is if the notary fails to fill in one of the names of the witnesses, then a witness must testify to prove the validity of the Will. Any failure to follow Texas law will result in a delay in the distribution of assets and result in additional costs to the estate (not to mention the normal costs of probate). Even if there is a problem with the Will, an estate can generally be distributed quicker through a Revocable Living Trust since there is no delay by having to follow state probate laws.
- Lack of privacy.
A Will is a public record once you apply for probate. An inventory (filed with the court) of the assets belonging to the estate of the deceased is also a public record. Trusts are private.
- Will is not effective until death.
Since a Will is not effective until after you pass and the court approves the validity of the Will, it becomes incumbent for you to have a financial power of attorney as part of your estate plan for an agent to handle your assets, contracts, etc. particularly if you become disabled. The problem is sometimes financial powers of attorney are not recognized or are limited and the expensive guardianship process is then needed. Funded Revocable Living Trusts are effective immediately and should avoid guardianship of the estate (to the extent the trust is funded).
- Easier to contest.
Although trusts can be contested as well, it is generally easier to contest a Will.
- If you own real estate in another state.
If you own real estate in another state, then it is generally better to have a trust. If not, you may have to first probate the will in the state of your residence and get approval of the will by the probate (or similar court) of the state where the other real estate (non-residency state) is located (to be able to sell, deed, etc. the real estate in the non-residency state). This is called ancillary probate. As a result, it cost more time (and money) for probate.
- Ongoing business.
Due to the time needed to get court approval of a will and the need for an ongoing business to have minimal time delays, it is generally better to have an ongoing business owned by a trust (unless the business is a limited liability company or professional association owned by professionals that only those of that profession can have an interest). See 5 above under will advantages.
It should again be mentioned there are numerous types of trusts that accomplish specific goals that cannot be accomplished by a will (i.e., charitable remainder trusts, first party special needs trusts, irrevocable life insurance trusts, Medicaid asset protection trusts, etc.). As a result, your goals must be determined for a plan that fits your specific needs.
If interested in learning more about this article or other estate planning, Medicaid and public benefits planning, probate, etc., attend one of our free upcoming Estate Planning Essentials workshops by clicking here or calling 214-720-0102. We make it simple to attend and it is without obligation.