Trusts in Wills: Too Costly?
No, the title does
not mean that you should have confidence in your Will.
What the title refers to is Trust provisions contained in a Will.
Let’s look first at the components of a Trust.
All Trusts have three
major components: (1) the Creator or
Grantor, (2) the Trustee who performs duties and (3) the Beneficiaries, the
people who receive the benefits of the assets in the Trust.
Trusts that are
created by provisions in a Will are called “Testamentary Trusts.” If the
Trust is created independently of a Will, the term “Living Trust” is often
used. Since most living trusts are
changeable, the moniker “Revocable Living Trust” (RLT), is commonly used for
such trusts.
RLTs are effective
when signed. Wills, by definition,
go into effect only when a person dies. This
truism is one of the basic reasons why many estate planners prefer RLTs over
trusts in Wills.
If the Trust
provisions in a Will are designed to facilitate handling the assets of a
disabled person, the Will cannot go into effect until the person dies. At that
time, the deceased person would not benefit from such provisions, although his
heirs may.
The assets placed in
a Testamentary Trust after the person dies must first pass through a legal
system called “probate.” Probate,
basically, is the administration of the assets of a decedent.
Let’s take an
example. Mr. X prepares a Will
containing a Testamentary Trust for the benefit of X’s grandchild named Abe.
Abe is nine years old when Mr. X dies and the Will says that the assets
of the Testamentary Trust for Abe are to be held in trust until Abe reaches age
25 (a period of 16 years).
The probate officials
who are in charge of Will administration and Testamentary Trusts in
Mechanically it works
this way. When someone dies with a
Will providing for a Testamentary Trust, first the assets of the estate of the
decedent have to be probated. In
other words, the funds have to be administered and accounted for in the probate
system. Once a required accounting
is filed, then assets designated for a Testamentary Trust are placed in trust.
At this point, it may be necessary to obtain a commercial bond.
Often the family
members will pay for the commercial bond, which can be comparatively expensive.
For example, in a recent estate handled by our firm, a Testamentary Trust
of around $150,000 incurred annual bond costs of $370.
If the bond is posted for 10 consecutive years, then the total costs for
the period would be $3,700.
Conversely, if an RLT were used, and a commercial bond was not required
by the provisions of the RLT, there would be no cost for annual bonds.
Sometimes
it is possible to pay a lump sum for the bond for the duration of the
Trust period and get a discount, but that usually entails paying a large sum up
front. Advanced bond payments may be
money wasted if, for example, a beneficiary should die prior to reaching the age
of distribution.
There are various
ways of protecting RLTs without the need for bonds and judicial supervision.
Perhaps the best way is to have a CPA review RLT disbursements every
year. Another way of providing a
measure of protection would be to rely upon a mature person of a younger
generation.
In addition to the
bond costs, there is also the expense of preparing an annual accounting to the
probate court for the Testamentary Trust. Usually
this will require the assistance of a professional, such as an attorney or CPA,
thus causing a further drain on Trust assets.
Thus, Testamentary
Trusts are often not a good idea because of the additional costs and the need
for the continuing involvement of professionals.
There is not anything inherently wrong with Testamentary Trusts, but
anything that can be done in a Testamentary Trust can be done in an RLT, without
the need to purchase a commercial bond.
If you need further assistance with regard to these subjects, call Newland & Associates.
Copyright 2005
Published by the law firm of Newland & Associates, PLC
9835 Business Way
Manassas, VA 20110
Call us at (703) 330-0000 for a full range of business law and
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