Our advisors utilize their experience and expertise and that of their colleagues to develop the best solutions for your complex personal and professional financial situations.
Actionable planning strategies to inform and guide your decision-making.
February 14, 2023
A common decision when creating an estate plan is whether to use a will or a revocable living trust. There is a lot of confusion about when one should be used over the other. The answer is heavily dependent on which state you live in and what type of assets you own. In other words, as is common in legal parlance, “It depends.”
Wills and revocable living trusts generally perform the same function: they determine who will receive your assets after you pass away.1 There are, however, several differences between the two options that can make a material impact on the timing, cost and way assets are transferred to your heirs.
Both wills and revocable living trusts (hereinafter referred to as “revocable trusts”) are valid upon proper execution and are both fully revocable, meaning they can be changed. There is, however, a major difference in their implementation.
Wills become effective at death. While the will’s creator is alive, they continue to hold assets in their individual name. If an individual becomes incapacitated, they will need a legal document called a power of attorney to allow family members or friends to handle their financial affairs. Or, if no power of attorney exists, the court will appoint a conservator to handle the incapacitated individual’s affairs. Conservatorships are cumbersome and can be expensive due to court oversight. At the death of the will’s creator, a personal representative (sometimes referred to as an “executor”) is appointed to administer the decedent’s estate according to the provisions of the decedent’s will.
Revocable trusts become effective while the trust creator is alive. That means assets owned by the trust are held in the name of the revocable trust (e.g., John Doe, Trustee of the John Doe Revocable Living Trust) rather than in the trust creator’s individual name (e.g., John Doe). The trustee appointed by the revocable trust manages the trust assets. The trust creator generally serves as trustee of the revocable trust while they are alive, and a successor trustee is named to act at the creator’s death or upon the creator’s incapacitation.
Probate is the court-supervised process of transferring a decedent’s assets to heirs. Wills are subject to probate while revocable trusts are not. Historically, when probate was required, attorneys charged a percentage of the total value of a decedent’s estate as a fee for handling probate (referred to as a “percentage fee”). Court oversight and attorney percentage fees made probate a lengthy and expensive process. In response, there was an increased use of revocable trusts to avoid probate. Currently, many states now provide for streamlined probate in uncontested probate cases, which reduces complexity. Also, many states now require attorney fees to reflect the actual time and effort expended on probate matters rather than simply allowing a percentage fee to be charged. This has reduced the cost of probate in many instances. That means, in many states, the benefit of using revocable trusts due to the expectation that it will reduce the cost of probate has been significantly diminished. Of course, probate remains relatively expensive in some states2 so the use of revocable trusts, solely for cost reduction, may still be advisable, depending on your state of residence or if assets are located in multiple states (e.g., vacation home in another state).
In order to avoid probate, revocable trusts must be properly funded. Some clients mistakenly believe that by simply signing their revocable trust, they have funded it. That is not the case. In order to fund a revocable trust, the assets must be retitled in the name of the trust. That means ownership of bank accounts, investment accounts, real estate and business assets must be changed to the name of the revocable trust. If that does not happen, the trust will be an empty shell and probate will still be required following the death of the decedent.
A will becomes public at death. When someone dies, their will is required to be filed with the court to open a probate proceeding. This makes the will a public document. An inventory of assets is also generally required to be filed with the court and accountings may also be required. This results in public disclosure of the decedent’s personal assets and potentially public disclosure of the distribution of specific assets.
Revocable trusts allow for privacy because they are not required to be filed with the court, do not require court oversight at death, and no public disclosure of personal information occurs. For this reason, revocable trusts are preferred by persons seeking privacy.
Reality: Revocable trusts can provide estate tax benefits, but they must use special language beyond the standard probate avoidance and asset-transfer purpose of the trust. Wills can also create testamentary trusts that accomplish similar estate tax reduction benefits.
Reality: It is always recommended that clients creating revocable trusts also create a pour-over will. The pour-over will “pours over” any individually owned assets into the trust at the decedent’s death via the probate process. Without a pour-over will, assets not owned by the revocable trust at death will be distributed according to state law, not the terms of the trust document.
Reality: Wills are subject to claims of the decedent’s creditors in probate. It is not uncommon for people to believe revocable trusts are not subject to creditor claims. Although beneficiaries of an irrevocable trust are often shielded from creditor claims, the assets of a revocable trust are subject to creditor claims against the trust creator, during the creator’s life and for a period of time after death.
Probate provides for a fixed period of time in which creditor claims must be submitted or else they are extinguished. The probate period for creditor claim submission is usually shorter than the statutory time that creditors can pursue claims against a decedent’s revocable trust after death. For example, if creditor claims are required to be filed within 90 days from publication of notice of probate but the statutory time period for filing claims against a decedent’s revocable trust is one year from the date of death, it might make sense to open a probate proceeding for the purpose of extinguishing creditor claims as soon as possible. This can occur even if no assets pass through probate because a revocable trust was used.
Reality: A personal representative administers a will after a person dies. They have no authority over assets while the will creator is alive. If the will creator is alive and becomes incapacitated, an agent named in the incapacitated person’s power of attorney will be eligible to handle their financial affairs or, if no power of attorney exists, the court will appoint a conservator. Successor trustees are named in a revocable trust to handle trust assets if the incapacitated person can no longer act as trustee. No court intervention is required when a successor trustee is authorized to act. Neither a personal representative nor an agent named in a power of attorney has authority over trust assets.
The decision whether to use a will or revocable trust varies according to the person doing the planning and their unique goals and circumstances. The important thing is to realize the differences between the choices and how those differences can impact your estate plan. A chart highlighting some of the major differences between wills and revocable trusts is included as Exhibit A to this commentary. Please contact the Estate Planning Services team at Cerity Partners if you need any assistance in determining which option to pursue.
*Through use of a testamentary trust
1 This discussion focuses on revocable living trusts. Lifetime irrevocable trusts are used to benefit someone else during the trust creator’s life. Lifetime irrevocable trusts are generally used for estate tax planning purposes and are an advanced estate planning technique. Revocable living trusts are standard estate planning documents that are used for basic estate planning and sometimes estate tax planning, even in situations in which lifetime irrevocable trusts are also used for estate tax planning purposes. Testamentary trusts are created by the will of a decedent, so they only come into effect after a person has passed.
2 Commonly cited examples are Florida and California. Consultation with a local attorney is always recommended.
Please read important disclosures here.
Paul oversees Centralized Estate Services for Cerity Partners and is a Partner based out of Denver, Colorado. He works with Cerity Partners’ advisors to review...
March 17, 2023 — Silicon Valley Bank broke some cardinal rules of banking…but it doesn’t look like it will spread but the Fed did the right thing...
March 14, 2023 — Are you planning for a jet-set retirement? Or are you already spending part of the year abroad? If so, Cerity Partners can help you navigate the complex world of living in more than one place, so that you’re able to preserve your wealth.
Ben Pace, Christian Thwaites and James Lebenthal
March 13, 2023 — FDIC takes control of Silicon Valley Bank amid concerns over bond portfolio losses and potential systemic risk. The implications for interest rates and the Fed’s tightening cycle as well as the current state of unemployment and inflation remain top of mind.
March 6, 2023 — The global economy continues to avoid a near-term recession, as consumer spending remains strong and the effects of monetary tightening have yet to be fully realized. Opportunity can still be found in the bond and equity markets though equity market advances will be dependent upon progress on inflation and clearer signs the Fed is close to the end of its tightening cycle. Read more in our March 2023 Economic & Market Outlook.
Daniel Park and Cheryl Donaldson
February 17, 2023 — With the passage of the Tax Cuts and Jobs Act of 2017 that eliminated the “marriage penalty” tax brackets, filing a joint federal tax return has mainly become a foregone conclusion for married couples. Under certain circumstances, couples may still opt to file separately. Partner Dan Park and Principal Cheryl Donaldson outline several factors that warrant careful consideration and planning when filing your taxes.
Curious about learning more? Let’s talk.
Tell us about yourself and your current financial situation without cost or obligation. Receive an introduction to a wealth management colleague, have a personal conversation, and get your questions answered.