Far too many people assume that estate planning can be reduced to the creation of a simple will. Indeed, a will can facilitate asset transfers after you pass away, but in many cases, a trust of some kind will be a better choice.
Estate Administration
If you use a will to serve as an asset transfer vehicle, you name an executor to act as the administrator after you pass away. This is a role that comes with some serious responsibilities, so you should take this into the consideration when you are making your choice.
The executor will admit the will to probate after your passing. This is a public proceeding that is supervised by a court, so the records are available to anyone that wants to access them.
When the estate is being probated, the executor will notify creditors, and the assets will be identified and inventoried. An Employer Identification Number will be obtained by the IRS, and final debts will be paid.
Appraisals and liquidation of property will often be necessary, and these things take time. Ultimately, an estate will be in probate for about nine months even if everything goes smoothly, and more complex cases can take longer.
No inheritances are distributed while the estate is in probate, so this is another drawback along with the loss of privacy. From a financial perspective, there are court costs, the executor’s payment, attorney and accounting fees, and appraisal and liquidation charges.
If all this does not sound very appealing to you, there is a simple and efficient way to avoid probate: You can use a revocable living trust as the centerpiece of your estate plan.
In a material sense, nothing would change after you transfer assets over to the trust because you would be the trustee. After your death, the successor trustee that you name in the trust declaration would distribute the assets to the beneficiaries outside of probate.
Protect a Spendthrift Heir
Are you comfortable leaving lump sum bequests to everyone on your inheritance list? If you have concerns about the money management capabilities of someone in the family, you are taking a risk if you leave them a large direct inheritance with no safeguards.
This is the arrangement if you state your final wishes in a simple will. On the other hand, if you use a living trust, you can include a spendthrift provision.
The trust would become irrevocable after your death, so the principal would be protected if lawsuits are filed by the beneficiary’s creditors. A trustee that you designate while you are living would control the assets, and the beneficiary would not have direct access.
You have the freedom to arrange for any type of distribution schedule that will assuage your concerns. For example, you can instruct the trustee to distribute the trust’s earnings broken up into monthly payments, and portions of the principal can be added to reach a certain dollar figure. This is one example, and the trust can remain active for years.
Estate Tax Efficiency
If you maintain direct personal possession of your property until the time of your death, it would all be part of your taxable estate. This would damage your legacy significantly, but you can gain estate tax efficiency if you use a trust, or multiple trusts.
The revocable living trust would not help because you maintain complete control of the assets while you are living. Tax efficiency trusts are irrevocable trusts like the generation-skipping trust, grantor retained annuity trust, charitable lead trust, and qualified personal residence trust.
On the federal level, the estate tax carries a 40 percent top rate, and there is a $12.06 million exclusion in 2022. This much can be transferred tax-free, so it is only a factor for high-net-worth individuals.
In Connecticut, we have a state-level estate tax to contend with as well, and the exclusion is contact form on this site you can fill out if you would prefer to send us a message.
Mr. Nirenstein is licensed to practice before the courts of the State of Connecticut and the United States District Court. He is a member of the Connecticut and Hartford County Bar Associations, and the Estate and Probate, Elder Law, Business Law and Real Estate Sections of the Connecticut Bar Association.
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