Do I Need a Will or a Trust? (Part One)

Whether you should prepare a will or trust is a personal decision dependent on many factors. Some of the most important factors include: your family situation, the number and type of your assets, and whether reducing the cost of your estate administration is an important factor for you. In part one, we will discuss the difference between a will and a trust. Part two will discuss some of the factors you should consider in deciding which estate plan is best for you.

What is the difference between a will and a trust?

Will. A will is a document that sets out your wishes for the disposition of your assets after you die. After you pass, the will is filed with the court and may be subjected to a process called probate. Probate is the court-supervised administration of your estate. An executor is appointed and they are responsible for collecting your assets, paying your valid debts, filing your final tax returns and giving your assets to your heirs.

The process of probate in Alameda County, California takes between eight months to a year to finalize. The costs are also set by statute and represent a percentage of your gross estate. In California, where land values are high, this can be a significant amount of money. In a small estate with only a house to probate, one can expect to pay between $15,000 and $25,000 in attorney’s fees.

Trust. A trust is an entity that you form in order to hold your assets. Clients often find it useful to think of a trust as a company with themselves as the CEO and sole shareholder. In a trust, the trustee manages the assets like a CEO, and the beneficiary receives the benefit of the trustee’s management, like a shareholder. When you pass away, the trust remains, but a new trustee is appointed (like a new CEO), and new beneficiaries come into play (your heirs are like new shareholders). Often the trustee’s job, is similar to the executor’s, in that they manage assets and pay debts, prior to distributing your assets to your heirs.

A trust only controls the assets which are placed into it. However, these assets are not subject to probate because of the legal slight-of-hand that they are not owned by you, but by the trust. This makes the distribution of the assets private, and not court-supervised, which can greatly speed the process of distribution.

A private distribution is also not subject to the statutory fees. If an attorney’s help is required, and a little help is definitely recommended to keep you out of trouble and on track, the attorney will generally ask for a deposit and charge an hourly rate. If it is a moderate estate, and there are no problems with creditors or beneficiaries, the attorney’s fees will be around 1/10th the price of probate.

Pricing. A will, in most situations is a much less costly document for an attorney to prepare. One should expect to pay in the neighborhood of several hundred dollars for it. A trust, on the other hand, is generally several thousand dollars, and can be more, depending on the severity of the complications in your family situation or assets. However, this price differential should be weighed against the nearly 10x difference in price one’s family will pay to go through probate, versus the much lower cost to administer a trust. In the end, the real question is: Do you want to pay now or later?

Part Two will examine some factors in determining whether a will or a trust is right for you.