Estate Planning 101: Last Will & Testament vs. Revocable Trust

On a weekly basis, I receive calls from potential clients who inform me that they "need" or "want" a trust, by which they usually mean a revocable trust. When I inquire as to why they think a trust is necessary, there are several common answers: (1) "I want to avoid probate." (2) "My cousin/uncle/mother/neighbor has a trust, and told me I should get one." (3) "I saw a financial advisor on tv who recommended a trust."

Not one of these reasons in and of itself is justification for creating a revocable living trust. While revocable trusts have been used with increasing frequency in recent years, in many cases, a Will is a less expensive and easier tool for passing your estate to the next generation. To decide whether a revocable trust is an appropriate option for you, it is necessary to understand the differences between a Will and a revocable trust.

In a Last Will and Testament, you provide instructions with respect to how you want your estate to be administered and distributed upon your death. You can make bequests of specific amounts, percentages, or of specific types of property to family members, friends, and charities of your choosing. You can create a trust under your Will (known as a testamentary trust) to hold property which would otherwise be distributable to a surviving spouse, child, or disabled beneficiary. You can direct how you want your estate taxes to be paid if your estate will be subject to tax. You can name a guardian for minor children.

While many people are apprehensive about probate (either because they have heard horror stories either on tv or through family members and friends), in most situations, probate (the process by which a will is admitted to Surrogate's Court) is fairly simple and inexpensive in New York. Probate can become prolonged and expensive when heirs cannot be located, the validity of a Will is called into question, or family members and/or beneficiaries start fighting over assets. However, when the family relationships are not contentious and the assets uncomplicated, a Will is often sufficient.

In certain situations, you may want to use a revocable trust. A trust is basically an agreement between you, as the creator of the trust, and your chosen trustee in which you instruct your trustee about how to manage your assets during your life and distribute your assets upon your death. Revocable trusts can accomplish distribution of your property while avoiding a probate proceeding in Surrogate's Court. When a will is being offered for probate, all distributees (i.e., one's natural heirs) must be notified, even if they are not named in the will and even if the validity of the will is not in question. This can become a problem when you do not know who your relatives are or where they live. In order to avoid expensive and time consuming genealogical searches, it makes sense in these situations to consider using a revocable trust. Revocable trusts are also useful for individuals who have real property in more than one state and want to avoid the hassle and expense of multiple probate proceedings. Individuals who want to maintain a greater degree of privacy with respect to their assets or their intended beneficiaries also frequently prefer revocable trusts to Wills.

During your lifetime, you can serve as trustee and lifetime beneficiary of your trust; and for income tax purposes, you and the trust are treated as one and the same. In order for a revocable trust to be effective, it is crucial to retitle all assets in the name of the trust. Otherwise, your beneficiaries may end up in Surrogate's Court anyway, exactly the situation you were seeking to avoid. If you are working with an attorney to set up a revocable trust, it is reasonable to expect that attorney to provide you with clear guidance on how to fund your trust. This may require deeding real property into the trust, re-titling bank accounts, and transferring stock.

As every person's situation is different, there is simply no one-size-fits-all estate plan. A revocable trust is a good tool for some clients, but it is not a requirement for every client. To determine the estate plan that is best for you, you should meet with an attorney to review your family circumstances and planning goals.