Trusts and Wills Defined, Part 1: What is a Will?

This article is reproduced by permission from Living Trusts for Everyone: Why a Will is Not the Way to Avoid Probate, Protect Heirs, and Settle Estates by Ronald Farrington Sharp, newly released by Allworth Press. © Ronald Farrington Sharp 2010. If you want to know a good deal about estate planning and trusts but don't want a 400-page boring book to read, I highly, highly recommend getting this one. It's short, to-the-point, and very informative.

Years ago I started doing revocable trusts as a way of keeping my clients out of probate. Now, after having done nearly four thousand trust-based estate plans, I can confidently assure you that a will is not the way to plan your estate.

Wills have to be probated.

Trusts don’t.

Most people believe good estate planning is having a last will and testament made up by their local lawyer. Most people are wrong. The reason they believe wills are good is because they pay their lawyer, who tells them so. Of course, lawyers usually have a vested interest in seeing you go through probate.  Much of the cost of probate is attorney fees. It is not, as they would have you believe, “court costs.”

The actual cost of probate is unpredictable in most cases. It is usually based on the hourly rate of the lawyer—which may be hundreds of dollars per hour—multiplied by the total amount of time to complete the case. There can be a big incentive to “bill hours.” Every telephone call, letter, meeting, and court appearance is recorded and billed. Since probate cases usually go on for one, two, or three years, the cost can be very high indeed. And attorney hourly rates vary widely. Hourly rates for probate work may run from $150 to $500 per hour, so it doesn’t take long for the bill to get very large.

The family that hires the attorney rarely complains about the fees, thinking that there is nothing that can be done, and accepts whatever is billed to the estate. Here is a tip and something most people do not realize: Attorney fees are negotiable in most cases, and you can also, even in a probate case, ask the attorney to allow family members to do as much of the nonlegal work as possible to keep the bill down. This is rarely done and no one has ever asked me to do this.

Probate is, for the most part, pretty simple stuff. Except in contested cases or where litigation is needed, the probate process consists of filing a series of fill-in-the-blank forms in the right sequence and timeframe. It is not unusual for a legal assistant or secretary to fill out the forms. The attorney involvement in the process is typically very minimal, even though the case is often billed as if the attorney was hands-on every step of the way. The point is that you are paying a lot of money for what amounts to clerical work.

It’s not always billable hours. Certain states set the attorney fee portion of the probate cost as a percentage of the gross estate. This may actually be even more unfair than the hourly rate method. In California, for example, the following are the maximum rates that attorneys can charge for probate (and you can bet that nearly everybody is going to charge the maximum).

• 4 percent on the first $15,000
• 3 percent on the next $85,000
• 2 percent on the next $900,000
• 1 percent on the next $9 million
• 0.5 percent on the next $15 million

So a typical $500,000 estate would have attorney fees of $13,000—a lot of money. However, the executor (also called the personal representative) would be entitled to an additional $13,000 fee. So now we are up to $26,000 and have not included the cost of bonds, filing fees, and publication costs. This is, in my opinion, a very unfair way for costs to be assessed. It may take no more effort or time to probate a $150,000 estate than it does a $500,000 one, yet the fees are vastly different and not related to the effort expended or expertise needed. Most states have gotten away from the percentage fee because of this disparity, but an hourly rate may actually end up costing the estate more. Court costs are now being looked at as a source of revenue for the state. Florida is considering (if they haven’t already done it by the time you read this) increasing the court filing fee for probate to $1,000 (and up to $2,000), up from the $280 currently charged. This is in addition, of course, to executor fees and attorney fees. Then there is the tax levied on the size of the probate case in some states. This is sometimes called an “inventory fee,” and is a percentage of the total estate paid to the court or the county treasurer. Personally, whenever I write a check to the government I think of it as a tax by another name. None of these costs is incurred in independent trust administration.

The time involved is another big problem with probate. The probate case may have a minimum time that it must be ‘open’ to allow potential creditors of the deceased to present claims against the estate. Even in a simple one-asset estate, the case may have to stay open for a minimum of six months. But since there are no firm deadlines in probate, many attorneys put off closing it up and concentrate on their cases that do have deadlines, like court trials and real estate closings. The probate estate can be kept on the bottom of the pile. I have read that the average time to close a probate case is fifteen to eighteen months.  This will vary state to state and attorney to attorney, with some estates being kept open for years.

So avoiding probate is a big deal, no matter what your lawyer tells you. And the living trust is the best way to do it.

According to the National Association of Estate Planning Councils, only about 5 percent of people with an estate have done any estate planning at all. And most of those have done a will rather than a trust. For those who die without a will, most folks rely on state law to determine what happens to their estate at death. A will may be better than nothing at all, but it pales in comparison to the value of a trust.

Before we go too far, let’s define our terms. What exactly is the difference between a will and a trust?

What is a Will?

A will is really just a written document telling who gets what part of your stuff at your death, when they get it, and who is in charge of getting the assets to the people who are supposed to get them.  You can write your own will in your own handwriting (what lawyers call a holographic will) or it can be typed up, usually by a lawyer, and ceremonially witnessed and/or notarized. You can buy a will online or even get a fill-in-the-blank one at the office supply store. Some states even have a state-promulgated “statutory will,” which is another fill-in-the-blank form. Wills are pretty easy to make and are usually less expensive to create than a trust. The big cost of a will comes later, when the probate fees are counted in.

The executor (also called the personal representative or sometimes the administrator) is the one who is in charge of seeing that these written instructions in the will are carried out under the supervision of the court.

The instructions in the will are really instructions to the probate court—who gets what when, and who’s in charge. After your death, if there is anything left in your name to be probated, it is necessary to file the will in probate court because a court order is the only way your heirs can get your stuff turned over to them legally. There are a number of ways to avoid having things in your own name that have to be probated, such as giving everything away before you die or having everything in joint ownership, but these methods have problems of their own to be explained later in this book.

An example: I had a client who married a woman who owned a house in her name only. They lived in her house together for years, and he even signed on to the mortgage when it was refinanced. She then died suddenly. The house was in her name alone and his name was never added to the deed. My client was very upset when I explained that the house was not his until the probate court said so. His wife had made a will that left everything to him, but that was not in itself enough—which was a big surprise to him. He could not get full title to the house transferred to him until the probate court process was completed and all the expenses were paid. This case cost thousands of dollars in probate costs because of poor planning.

Another example: Dad dies, leaving no wife but three adult children. He has a house and some bank accounts and other investments. He has a will that says everything goes equally to his children. In order for those children to sell the house, they need to prove they own it. Unfortunately, the will in itself is not sufficient proof for a land title company or a real estate mortgage company that the house now belongs to the children—they want a court order that the will is valid and the property belongs to the children. The will has to be probated to get that order and clear the title.

Interestingly, in most states the will in the above example is totally useless and was a waste of money for Dad. The reason is that if a person dies without a will, then state law determines who are a person’s heirs. These laws are called the laws of descent and distribution in case of intestacy (who gets what when somebody dies without a will). In the Dad-and-three kids example, most state laws say that children whose parent dies without a spouse share his estate equally. A will adds nothing to that. The probate process is virtually identical with or without a will, so whoever charged Dad for that will did nothing for the money. Dad should have had a trust.

Come back tomorrow when we'll finish this series with "What is a Trust?"

Comments

[Joe]

What's the point of having a will then? Has the meaning and usage of wills changed so drastically over the last century?

[Big Tex]

Before thinking about any of this too hard, look up the rules in your state first. In Texas for instance, probate is simple and relatively cheap. I think better advice would be to ask these questions of a lawyer in your state, and in relation to your own personal situation.

[Lauren]

Great article. As a paralegal working for an attorney who handles probate matters, I do a lot of the forms for the estates. Pretty much everything from the pleadings, inventory, inheritance tax return (state), taxes, real estate deeds, vehicle transfers...etc. But you know who still bills at $250 an hour, right?

[MasterPo]

The author left out a lot of important details about trusts.

For one thing, most living trusts are setup as irrevocable. Once an asset is put into the trust it's out of the control of the giver (the grantor) and can have major legal ramifications if you need to take the asset back. Not a lot of people like the idea of giving up such ownership control.

(You can have a revocable trust that will (usually) avoid probate but doesn't protect against Medicare issues.)

Another thing is the grantor and the trustee may not always be allowed to be the same person (depends on the laws of your local). So not only are you giving up an asset but now you have to trust someone else to manage it for you.

And a very important thing: Trusts get taxed at the corporate tax rate!! Which for most people is a LOT *HIGHER* than their own personal rates.

And there is a very confusing tax form to be filed each year for a trust.

All that said, a trust From personal experience MasterPo can tell you it is very nice to be able to assign assets from a trust without having to deal with the courts.

But well worth the cost to see a qualified lawyer.

[DIY Investor]

Fascinating post - especially about fees. It is exactly the same in investment mangement. It doesn't take any more work to manage $1.0 million than it does to manage $0.5 million but the investment manager gets 2x as much for the $1.0 million account. Talk about economies of scale!

[Rob]

Very interesting article. We do not yet have a will set up; no kids so we are not really worried about it. The only assets we have of great value are our retirement and investment accounts and those are set to transfer directly to a beneficiary, either my spouse or if we both die at the same time, my father. According to this article, it sounds like we shouldn't bother! Once we have kids we will certainly be having a will made but now I might lean towards a trust.

@MasterPro - I don't think the author purposely left anything out. He is doing another post tomorrow that will go into more detail about trusts.

[billyjobob]

This article insinuates the legal cost of going through probate are very high. Mostly because you must hire a lawyer. It is my understanding that although you can hire a lawyer for this, it is not required. You can go through probate without a lawyer. My will is very simple and I would think that it could be done without a lawyer.

[JoeTaxpayer]

Nice article, I look forward to part 2.
I think that 400 page book would be an exciting read. Did you have a particular title in mind?