Is it always best to avoid probate when estate planning?

By David Shields

WealthMark Advisors, Inc


Do the many drawbacks of probate mean that a living trust — which does not have to pass through probate — is the way to go? Not always.

Not many people can earnestly tout the benefits of probate. It’s far easier to point out its flaws: the probate process is lengthy (typically taking between nine months to two years), can lead to inheritance disputes among family members and is often very costly, sometimes requiring the sale of property and other assets that would otherwise have gone to beneficiaries. The court must confirm the validity of the will, an executor must be appointed, lawyers must make court appearances, paperwork must be shuffled around and notarized. Furthermore, because the proceedings are conducted in probate court, they become open to public scrutiny.

So added together, do these head-spinning drawbacks mean that a living trust — which does not have to pass through probate — is the way to go?

Not always.

To be sure, many people can benefit greatly from a living trust as opposed to a will, especially wealthier adults who own a number of assets and properties. Although upfront costs are higher in the form of financial advisor and attorney’s fees, a trust can save the grantor and his beneficiaries a lot of time and money since it doesn’t pass through probate and isn’t subject to estate taxes. Trusts also give the grantor more flexibility and control over who is entitled to assets and under what conditions. (For example, a grantor can stipulate that his 1960 Corvette goes to his son only once he finishes college.) And because trusts don’t differ much state-to-state — as opposed to wills, which might vary dramatically — someone who owns property in Texas, California and Florida, for instance, should definitely use a trust instead of a will.

But one of the most attractive features is that, because living trusts do not pass through probate, the only person with complete knowledge of and authority to execute the trust’s instructions — besides the grantor, of course — is the trustee. Unless the trust is formally disputed or contested in court, no one else can see its contents. For this reason, the grantor needs to select an exceptionally dependable, trustworthy person. The inherent risk of dishonesty is worth it, however, for those who wish to keep their estates private and out of the hands of the court.

A problem that too often sideswipes grantors and their beneficiaries, however, is that they fail to fund the trust. Funding a trust means transferring or retitling all assets — homes, vehicles, properties, bank accounts — into the name of the trust. (Incidentally, a generic trust name is preferable to a family name.) Failing to fund a trust renders the contract meaningless because any assets not retitled must then pass through probate — the very thing the grantor was trying to avoid.
This unfortunate oversight sometimes occurs when a financial advisor or independent agent sells a trust without also providing sound legal guidance.

In fact, a few high profile cases have taken place in recent years involving so-called “trust mills”: firms that sell estate plans such as annuities but don’t bother to follow up with any legal advice.

Those interested in setting up a trust, therefore, should work closely with an attorney.

Living trusts aren’t for everyone, though. If an adult with a modest income and few assets isn’t fazed by the idea of probate court, then a will can more than adequately arrange for the disposition of his estate. It might even be more feasible than a trust since it’s less expensive (initially) and has the power to appoint guardians for underage children. Many people with trusts, in fact, use “pour-over” wills to appoint guardianship and specify the disposition of assets not covered in their trust.

Estate planning is one of the most important tasks we face as adults, and it would be unwise to do it without the help of a financial advisor or attorney. Whether a will or trust is decided, everyone needs a plan.

So, where do you fall in the will versus trust discussion? Please share your thoughts.