Heir styles – Are wills or trusts better for your assets?
Nothing is certain but death and taxes – and the problems people can create for their heirs if they die without a will or trust that is tailored to their circumstances.
Experts agree that a will or trust is preferable to dying “intestacy” – without either – if you want to make sure assets go to the people you’d like to receive them.
But how a person accomplishes this is open to debate.
Advocates of wills point out that an estate that goes through probate is under court supervision, a valuable safeguard when a fractious family or an unscrupulous executor is involved.
Attorneys who favor living trusts point to their flexibility, low cost, privacy, and ability to avoid lengthy probate proceedings.
But both sides concede that neither instrument works in all circumstances, and they are united in their criticism of trust mills that offer low-cost living trusts that can lead to big problems later.
“With probate, there is court oversight from the beginning,” said attorney Christine Batista, a partner in Ruby and Batista in Nevada City, which specializes in estate planning, probate and trust administration law. “It’s clean, simple, straightforward.”
“The specter of having to probate an estate and the fees you have to pay tip the scales in favor of trusts on most occasions,” said attorney Stephen Haas of Grass Valley.
Probate is the court process of proving the validity of a will, a process that can be time-consuming and expensive in California. But Batista argues the benefits can far outweigh the problems of putting a will through probate.
“Wills work well for people with discord in the family, and even people who think there may be problems after their death,” she said.
“The biggest disadvantage to trusts is the greatest advantage to probate – supervision,” she wrote in an e-mail to The Union. “The trustee of a trust has no court supervision.
“With little or no accountability, anyone is capable of taking advantage of that absolute power … With probate, the court oversees the distribution of your assets and the executor or administrator … is accountable to the court, making temptation less likely.”
The probate process in California can be lengthy – generally eight to 10 months to settle an estate and distribute the assets in accordance with the will.
Then there are the costs, a variety of filing and other document fees, plus payments to probate referees and attorneys. Attorneys’ fees are set by statute and can range from 4 percent of an estate worth $100,000 to 1 percent for an estate worth more than $1 million.
Batista points out that a court can distribute up to 50 percent of an estate before probate is completed to ease financial distress caused by the process.
“Probate is expensive, but if your trust gets litigated, it’s going to cost more,” she said. “You should interview a probate judge to find out how many trusts end up in litigation.”
Haas concedes this can become a reality in families where heirs don’t get along. “If there are simmering problems among siblings, this can be a recipe for disaster,” he said.
But there are remedies short of expensive litigation, Haas added. If the beneficiary of a trust believes the estate isn’t being handled properly, he or she can petition a court for instructions that govern administration of the estate.
Haas, who deals with estate planning, trusts and wills and probate in his practice, believes cost, flexibility and the ability to avoid probate make living trusts appropriate for most people.
“The trust avoids probate, and that’s the primary reason,” he said. “Probate is too costly. While fees are based on the size of the estate, it’s the same amount of work whether the estate is worth $200,000 or $800,000.”
If a person leaves an estate subject to federal estate taxes – more than $1.5 million in 2005 – a trust can be structured to mitigate the tax, which ranges from 45 to 47 percent.
A person can also use a trust to control what happens to their property after they die, and a trust can be used to control use of assets by minor children and heirs who may need special care.
But a trust is useless unless assets are transferred to it – a step some people don’t take – and it won’t shield an estate from creditors.
“It’s a myth that a trust can provide protection against creditors,” Haas said. “That’s just not so.”
That’s one of several myths promoted by so-called trust mills that offer to prepare one for a low cost, typically around $400. In reality, Haas said, many of them are bait-and-switch operations.
After a trust is created, the customer is encouraged to place assets in the trust in the form of an annuity or some other investment vehicle that generates a large commission for the seller.
Batista said many trust mills don’t ask the right questions when designing the trust, and some don’t even bother to fund it.
“You end up with a pretty binder for $400,” she said.
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