One of the most basic and frequently asked estate-planning questions I receive is whether to use a will or a trust. A lot has been said about the ability to avoid probate through use of a trust. While trusts are indeed useful, and can avoid probate, there are important downsides to consider when executing all estate planning through trusts. In this article, I explain the upsides and downsides of wills and trusts.
It is true that, in Arkansas, assets held in trust pass outside of probate to the beneficiaries of the trust. Especially when the settlor (the person who creates the trust) owns property in multiple states, this is definitely a benefit. Further, trusts are enormously flexible tools. A trustee can hold and invest property on behalf a minor child, on behalf of you in the event that you become incapacitated, and can distribute assets based on any number of contingencies that you specify. Further, some assets, such as IRAs, life insurance, 401(k)s, P.O.D. bank accounts, and property subject to beneficiary deeds, pass outside of probate and cannot be governed by your will. Putting these assets in trust can give you more control over their distribution at your death.
Trusts, however, compared with wills are not without downside and risk. Among the downsides are (1) the lifetime maintenance of the trust, (2) the potential that your trust not encompass all of your assets, (3) lack of judicial policing, and (4) their limited use in guardianship proceedings. I explain each problem below.
First, the trustee of a trust owes to the beneficiaries of the trust fiduciary duties, which cannot be waived. A fiduciary duty is a legal duty to act solely in another party’s interests. The beneficiaries whom you designate in the trust can sue for breaches of fiduciary duties. This means for you a lifetime of trust administration, most likely requiring the work of attorneys and accountants. It is for this reason that trusts rarely save administrative costs. In fact, if administered prudently, they usually require additional costs.
Second, probate is avoided only with respect to assets that are in trust. If, then, you want your heirs to avoid probate, you must take care to transfer ALL of your assets into trust. Miss even one thing and your heirs will have to go to probate to distribute the remaining property.
Third, while the law imposes fiduciary duties on trustees, there is no authority that actively polices them. Because the majority of financial crime in Arkansas is perpetrated by family members, the oversight of the probate court can make sure that your loved ones actually receive what you intend.
Fourth, wills are better than trusts for including your desired guardian for your children. If both parents of a minor child predecease the child, typically a guardianship will be placed over the child. In deciding on a guardian, Ark. Code Ann. § 28-65-204 directs courts to prefer over all others “Any request contained in a will or other written instrument executed by the parent or by the legal custodian of a minor child for the appointment of a person as guardian of the minor child.” Technically, this would allow your preference to be stated in a trust. The problem is that trusts are private documents, and your trustee has no duty to inform the court of your preference. On the other hand, your personal representative has a duty to probate your will, thus providing assurance that your preference will be made known to the court.
I deal with probate all the time; it really is nowhere near as scary as most people believe. The horror stories you have heard are far and away the exceptions. Most probates (and all probates with which I have been involved) go smoothly. As for the cost of probate, I advise clients to put away between two-thousand and four-thousand dollars, depending on the size of your estate, in a payable-on-death bank account, and designate the trust as the beneficiary. The trust then can direct that the money be given to whoever accepts appointment as personal representative of the estate. While personal representatives are entitled to recover the costs they incur in administering the estate in probate, many do not have the money they need at the outset to hire an attorney to start the process. This scheme I just outlined can get them the needed money immediately.
Wills and trusts each have strengths and weaknesses, as I laid out above. For these reasons, I advise most people execute both a will and a trust. The trust can collect life insurance, IRA death benefits, life insurance, and other non-probate assets, and then distribute the proceeds as directed in the trust. Further, if after what I have explained above, you still wish to avoid probate, you can do your best during your lifetime to transfer all your assets into the trust. However, if you mistakenly fail to transfer all your assets, you have a will in place that governs the distribution and whatever remains.