Will or Revocable Living Trust: Which is Right for You?

By Thomas Hackett

You love and care about your family; but, have you planned for how they will be cared for when you are gone. If not, you're not alone. A recent study found that 65 percent of Americans did not have a Will. In fact, neither did President Abraham Lincoln, Sonny Bono, Tupac Shakur, or Martin Luther King, Jr., to name a few.

We all can be guilty of denying our own mortality. However, such denial can have serious negative impacts on those you love. Who is in charge of your property when you die? Who gets your property? Under what terms do they get the property? Who do you want to care for your minor children? There are lots of planning opportunities that can help minimize fighting between families, help people manage new wealth, and help make sure a person with a disability is able to preserve government benefits and get additional services. Planning for what happens when you die or become disabled is known as estate planning.

If you decide that estate planning is an important part of caring for your family and loved ones, the next question is often whether to use a will or revocable living trust.

Wills: What They Do and How They Work

A Will is a legal declaration by which a person, the testator or testatrix, names one or more persons to manage his or her property, known as the “estate,” and provides for the transfer of the estate at death. The person named to take care of the estate is normally referred to as the "personal representative."

Once a person dies, then the personal representative goes to court to prove the will through a process known as "probate." Then, with varying levels of supervisions by the court, the personal representative determines what assets and liabilities the deceased had, gathers those assets and pays the bills, and then transfers the remaining property to the people named in the Will. All of this is a matter of public record because of the court’s involvement in the process.

Revocable Livings Trusts: What They Do and How They Work

A revocable living trust, also known as just a revocable trust or living trust, is an arrangement where a person transfers assets, often referred to as grantor, to a person that controls those assets, often referred to as the trustee, for the benefit of the certain people, often referred to as the beneficiaries. There are three different roles within a trust:

1. Grantor: puts property into the trust

2. Trustee: manages the property in the trust

3. Beneficiary or beneficiaries: receives property from the trust

In a revocable living trust, the roles of grantor, trustee, and beneficiary are typically the same person.

The arrangement of the revocable living trust is governed by the trust agreement, which is what the grantor signs in making the revocable living trust. The trust agreement specifies who will be a trustee (and who will become a trustee later), who is a beneficiary, and how the trustee is to decide when property is to be distributed to a beneficiary.

In a revocable living trust, there are normally two phases. The first phase is when the grantor is alive and the trust is run by the grantor (serving as trustee) and for the benefit of the grantor (as beneficiary). The second phase is after the grantor dies and a new person becomes trustee and manages the trust for other beneficiaries. Unlike a will, after the person dies that created the revocable living trust, the next trustee, unlike the personal representative, does not have to go to court or be supervised by a court. The next trustee, known as the “successor trustee,” is able to immediately take over management of the trust and manage the trust for the benefit of the next beneficiaries.

With the choice between a will and a revocable living trust, there are three major advantages to using a will for your estate planning:

No retitling of assets. A Will does not require that you retitle your assets. Your will sets out how your assets pass when you die, and through probate your will is followed to transfer property.

Easier administration while alive. Another advantage of a will is that you don’t have to change the way you manage your assets. With a will, as it doesn’t become effective until you die, you don’t have to change the way you manage any of your assets or affairs. However, with a revocable living trust you have to keep your assets titled in it.

Less expensive to set up. Finally, a will is less costly to set up because assets do not have to be transferred into it and often the provisions are simpler than a revocable living trust. While there is a savings by going with a will over a revocable living trust initially, it can be more costly after a person dies with a will. In transferring all the assets to a revocable living trust, the grantor is forced to organize their assets (because of needing to transfer them), which can make for a more orderly administration when they die.

Making the choice between a will and revocable living trust involves competing factors. There are several advantages to using a revocable living trust.

Privacy. A revocable living trust is a private arrangement between the grantor, trustee, and beneficiaries. This does not require disclosure of the terms of the revocable living trust to other people. And, when a trustee needs to deal with third parties - such as a bank - regarding the trust assets, a certificate of trust can be used that only lists the necessary terms for the third party to know, rather than all of the trust’s provisions.

Disability planning. A revocable living trust also puts a system into place that allows for the management of the assets in the trust in case of the grantor’s disability. Typically, if a person became disabled and could not manage his or her assets, then a conservatorship needs to be filed with the court for a person to be appointed to manage the assets of the disabled person. Many third parties do not accept power of attorneys that are not on their own version of the forms. Having assets titled in a trust, such a revocable living trust, forces the third party to deal with the trustee of the trust, which is not necessarily the case with a power of attorney. With a revocable living trust, the next trustee is able to take over the management of the trust when the previous trustee is not able to manage the trust anymore (the precise mechanism is laid out in the trust instrument).

No probate. The third reason many people prefer to use a Revocable Living Trust is that it does not require a probate in court. This is also what allows for greater privacy. In particular, when a person owns real estate in multiple states, a Revocable Living Trust saves in having to have multiple probates. As property rights are governed by state laws, if a person dies with a Will and has real estate in Oregon and Washington (or other states), a separate probate proceeding is needed in each state to transfer the property. With a Revocable Living Trust probate is not necessary.

Neutral Factors Between a Will and a Revocable Living Trust

There are two factors that people often wonder about that do not have an impact on deciding between a will and revocable living trust:

Death taxes. For tax purposes, a revocable living trust is disregarded. The Internal Revenue Service, Washington Department of Revenue, and Oregon Department of Revenue do not treat property owned by a person in a revocable living trust or a will differently for income tax purposes or death taxes. There are many ways to minimize the impact of death taxes, but using a revocable living trust or will is not one of them.

Ability to change. As a will does not become effective until death, a person can change the terms of the will at any time before he or she dies. With a revocable living trust, it is effective once the assets are put into the trust, and the grantor can change the terms just the same as with a will.

Another Option to Avoid Probate: Community Property Agreement

In Washington state, people have another option to avoid probate on the death of the first spouse. This is done through a community property agreement. By using a this agreement, a married couple or domestic partnership can agree that all property is community property and will go to the other spouse at the death of the first, which avoids probate initially.

A community property agreement only avoids probate at the death of the first spouse, and so if both spouses died at the same time, then probate would not be avoided. In addition, probate is not avoided at the death of the second spouse. Furthermore, the first spouse to die is not able to have any control of what happens to the assets that pass to the surviving spouse at the surviving spouse’s death, which can be of particular concern with second marriages and blended families.

General Advice on Whether to Use a Will or Revocable Living Trust

Generally, we recommend that people under 50 years of age, in fairly good health, and with property in only one state use a will-based plan. This allows for more simplicity in managing the person’s affairs, but still puts the necessary framework in place for when death occurs. And, with a will-based plan, a couple can use a community property agreement to avoid probate on the death of the first spouse.

For people over 50 years of age or with declining health or with property in multiple states, we recommend a Revocable Living Trust-based plan. This provides for disability planning and avoids probate.

While we look up to President Abraham Lincoln and Martin Luther King, Jr. for their contributions to history, please do not look to them for guidance with your estate planning. Get started today. There are many factors that go into deciding whether to use a will or revocable living trust, but the starting point is that you need an estate plan to protect your loved ones when you’re not around and to protect you in case of disability. To get started on your estate plan, give Thomas Hackett at Horenstein Law Group a call: (360) 597-0968.