Answer:  It Depends

Recently a client asked me for my thoughts on Wills versus trusts. Wouldn’t she have been surprised if I answered, “I really don’t have any; whatever the client feels like.” Of course, that is NOT the case. I am a lawyer, after all.

In this article I’ll take a brief look at the difference between the two, together with my opinion as to the advantages and disadvantages of each.

By the way, here I will capitalize the document called a “Will” to avoid confusion with the noun (“where there is a will, there is a way”) or the auxiliary verb (“he will go see his lawyer”). For example, in ‘Bob usage‘ it might go, “He will go see his lawyer because he is of a strong will to sign a Will.” And of course, I ask all new clients, “Thy Will be done? Because if not, I can fix you right up.”

A Will is a document signed by a testator that meets the other formalities specified by North Carolina Law needed to pass probate property in the manner specified in the Will. The process of submitting a Will to the clerk of the superior court and proving to the clerk that the Will is valid and should be given effect is called “probate.” In fact, the word “probate” comes from the Latin verb “probare,” which means “to prove.”

The clerk of the superior court, unless serious disputes arise that are taken up to a superior court, supervises the process of administering an estate by requiring the personal representative (either an executor or an administrator) to provide a performance and surety bond to the clerk (unless waived), to give notices to creditors, and to furnish the clerk periodic inventories and accountings of the estate.

By the way, the only real difference between an executor and an administrator, is that an executor is named in a Will to windup the estate pursuant to North Carolina law and the terms of the Will, and if there is no Will the person-in-charge is named by the clerk of court and called an administrator. Together they’re referred to as a personal representative.

The clerk’s basic function is to insure that the personal representative satisfies creditors of the deceased and distributes the estate to beneficiaries as required by the terms of the Will or by law. The clerk’s jurisdiction generally extends, with some exceptions, to “probate property” – which is property of the deceased that is available to claims of creditors, as opposed to property that passes “outside” the estate as nonprobate property.

Probate Property Defined

Often it is easier to think of what nonprobate property is when attempting to define probate property. Common forms of nonprobate property are: retirement plan benefits (they pass according to the beneficiary designation form), insurance proceeds (again, they pass according to the beneficiary designation form), life estates (sometimes called “lifetime rights”), joint tenancy with rights of survivorship property (which will pass automatically to the other joint tenant), and annuities (beneficiary designation). Keep in mind, however, that nonprobate property can become probate property if the property passes to the personal representative (for example, an insurance policy may name as a beneficiary “my estate” and the insurance company will pay the proceeds to the personal representative).

Unless an estate is very simple, the probate process can be very confusing and challenging. While there is no requirement at all that you have an attorney handle the process, a myriad of legal issues can crop up (beneficiary disagreements, real estate questions, competing claims of creditors, uncooperative or difficult financial institutions, and various filing formalities that might vary over North Carolina’s 100 counties).

One other important type of nonprobate property are assets that are held by a trust with beneficiaries other than the estate at the time of the grantor’s death. These are often called “living trusts” and are the sorts of instruments that are often advertised as a way to avoid probate. They generally avoid probate because they are nonprobate property as described above. Trusts enable the grantor (the person who set up the trust) to determine who receives the money, when they receive it, and what conditions must be met. While a living trust is set up during the grantor’s life, a testamentary trust takes effect upon the grantor’s death and is often contained within the terms of the Will.

A word to many of my existing clients: I wrote above that living wills “generally avoid probate.” As many of you know, I employ an asset protection technique that involves the use of revocable trusts that actually triggers probate. If you are in this category please don’t be alarmed and think, “Hey, wait a minute, Mason told me we’d have to go through probate.”

Revocable vs. Irrevocable Trusts

Living, or inter vivos (more Latin meaning “between the living”), trusts come in two basic categories: Revocable and irrevocable. Revocable “living trusts” are perhaps the more common because the grantor can revoke it or amend it at anytime before his death and the proceeds remain nonprobate property.

A generic probate-avoidance revocable trust has NO asset protection features if Medicaid or other general liabilities that might threaten your assets is a concern. (Note to my existing clients: Read my note above regarding my special asset protection planning. Believe me, if you have one of these plans, you know it!).

Living Trust Advantages

The most-touted advantages of an irrevocable living trust are substantial (i) estate tax benefits to the grantor (but the estate tax now applies only to estates in excess of $11.4 million for an individual or $22.8 million for a couple), (ii) income tax advantages while protecting property (for example from Medicaid), and (iii) superior asset-protection features. Click here for an article I earlier wrote about trusts, Medicaid and asset protection.

Other advantages cover both revocable and irrevocable living trusts. If a living trust covers all of the grantor’s assets, then he or she may not even need a Will. Many people wish to spare their relatives from going through probate, and, as explained above, living trust assets are not subject to probate. Because there is no probate, survivors do not have to reveal the extent of the living trust’s assets through a public filing as happens with probate. If the grantor holds real estate in more than one state, a living trust covering that property may allow survivors to avoid probate in those states. Here’s an article that touches on using trusts to avoid ancillary probate (probate in another state in addition to probate in North Carolina).

Aside from the advantages for the survivors, a living trust can help a grantor manage his or her financial affairs because a trustee takes over the administration of the trust’s assets if the grantor becomes incapacitated. Some people are particularly concerned about how their finances will be managed if they should fall ill. A living trust may provide peace of mind because a trustee can continue to manage the trust’s funds in the event the grantor becomes mentally or physically incapacitated. On the other hand, a property drafted power of attorney can usually address these concerns.

Living Trust Disadvantages

The main disadvantage of a living trust is that the grantor loses some flexibility and control over his or her property and funds. Because a living trust becomes effective upon creation instead of at the grantor’s death, the assets covered by the trust start to be administered by the trustee at that time. If the trust is a revocable trust, usually the grantor can elect to serve as long as he is able and continuing control is an issue. If the trust is irrevocable, the grantor loses much control that he or she might otherwise have had. If an individual prefers to have unrestricted control over his or her assets, or feels that he or she may want to modify an estate plan, a testamentary trust or will provides the flexibility to change terms for as long as the grantor is able.

A living trust often costs more to establish than a will. In many states the costs of probate may be so high that the extra cost involved in establishing a living trust will certainly be justified. In North Carolina, however, probate is not quite as expensive as other states, so cost avoidance may not be as much an issue — but “hassle avoidance” may be a real concern. The question of whether to use a revocable living trust in lieu of a will must always be answered on a case-by-case basis.

By the way, inter vivos irrevocable trusts also avoid probate for the same reasons applicable to revocable trusts.

So . . .

A “one size fits all” approach is not wise. Unfortunately, there are many “trust mills” that advertise the “wonderful advantages” of living trusts, hold seminars to tout those advantages (often with a free lunch!) and often “cold call” prospective clients at home. This approach often furnishes the client a mass-produced (and very expensive) document that does little to address a client’s real needs.

Nevertheless, we often design and use irrevocable living trusts to achieve certain important family asset protection goals.

The major advantage of a Will and a testamentary trust contained in the Will is that the grantor retains absolute control over his or her assets. Because a testamentary trust becomes effective only upon the grantor’s death, the grantor may make changes to its terms any time before death. For many people, retaining control of their property is an important goal that testamentary trusts help them achieve.

Retaining control can have its disadvantages, though. If the grantor becomes incapacitated prior to death, the trustee cannot take charge of the trust assets in order to manage the grantor’s finances during that time. A guardianship may be required for such incapacitated grantors if adequate provision has not been made through powers of attorney. Guardianship issues, however, are easily avoidable through proper planning, usually through the use of a well-drafted power of attorney.

 

Originally published January 8, 2010; Substantially revised March 8, 2019