07 Jul Choosing a living trust vs. a will

Q. What if any are the advantages or disadvantages of a “trust” compared to a “will” or other documentation for when the end comes?
— Unsure

A. Trusts and wills are both important estate planning tools.

Your question made Andrew Novick, a certified financial planner and estate planning attorney with The Investment Connection and Brookner Law Offices in Bridgewater, think of a recent dinner party he attended.

He said he overheard a couple declare they were going to save taxes because they executed a living trust. He said he wanted to “set them straight,” but he didn’t think it was an appropriate setting.

Novick said a living trust can direct what happens to assets at death similar to a will, but there is still a lot of confusion about the advantages of a living trust.

“Since the grantor — the person who establishes the trust — can revoke a living trust, the trust is viewed as a mirror image of the grantor and does not provide any type of income or estate tax benefit,” Novick said. “If the trust continues after the death of the grantor, it becomes irrevocable.”

Novick said a living trust can’t address everything, such as naming a guardian for minor children, so a will is still needed even in situations where there is a living trust.

Plus, he said, a will is always needed to address any assets that didn’t get transferred into the living trust before death.

“Although I am a big fan of trusts, I don’t often recommend living trusts,” he said. “Instead, I generally advise clients to stick with a will as the estate planning vehicle of choice and incorporate trust provisions into the will if desired.”
Still, there are situations when a living trust can be useful, Novick said.

The No. 1 reason to use a living trust is to avoid probate. A will needs to go through probate but a living trust does not.

“In New Jersey, probate is an inconvenience – there is some cost and time delay before assets can be distributed – but it isn’t considered overly burdensome,” he said. “I understand that living trusts are much more popular in some other states, such as Florida, where the probate process is more onerous.”

He said because a living trust does not go through probate, all transactions are private, which is important to some people. A will, on the other hand, becomes part of the public record once it is probated.

Novick said owning out-of-state property in a living trust can also be a smart move in order to avoid what is known as ancillary probate, which is a separate probate process in the property’s home state. However, he said, ancillary probate can be avoided without a living trust if the property is transferred into another entity, such as a corporation or LLC, before death.

“The corporation or LLC also provides the additional benefit of liability protection that isn’t present in a living trust,” he said.

A living trust can also provide for the ongoing management of assets if you are incapacitated, but this can also be accomplished through the use of a durable power of attorney.

So in the end, Novick said he’s a big proponent of trusts and there are a variety of different types of trusts. Used properly, a trust can save estate taxes and provide protections against claims from creditors, equitable distribution in divorce, and from a beneficiary’s own poor spending habits. Trusts can also be useful in special needs or long-term care planning situations.

“In order to get these benefits, the trusts typically must be set-up as irrevocable trusts during one’s lifetime or at death in the will,” he said.

You should seek out the counsel of a qualified estate attorney to discuss the pros and cons of establishing any type of trust.

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This post was first published in July 2016.