The Benefits of Trusts as Opposed to Wills in New York

There are good reasons why a person would choose a trust over a will. Here is a list of some of them.

Qualify for Medicaid – There are several types of trust that can help some individuals qualify for Medicaid, including home care and nursing home coverage. Learn more about Medicaid trusts.

Protection from creditors and lawsuits. A properly executed and funded irrevocable trust will shield the principal of the trust from creditors and lawsuits.

Avoid Probate – Probate proceedings can become expensive and delayed. Property that you will transfer to a trust will not have to go through probate.

Protection from your children’s spouses and creditors. You may not want any of your hard-earned assets to go to your child’s spouse, whether in divorce or as an inheritance. You do not want any of the assets you give to your child to go to your child’s creditors, whether as a result of a lawsuit or in bankruptcy.

Maintain Privacy – Proceedings in probate court are public record. Any person or organization will be able to find out the extent and location of your assets. Not so with trusts.

Avoid Multiple-State Probate Proceedings – If you have property in multiple states, you can avoid ancillary probate proceedings by transferring your property into a trust. Upon your death, the property will pass according to the trust and multi-state Surrogate’s Court proceedings will not be required.

Protection from irresponsible beneficiaries. A trust provides limits on how your beneficiaries can spend the assets. For example, you can specify amounts upon reaching a specified age.

Avoid Interruption of Income and Use of Assets – A trust provides for the continuity of management of your assets, and avoids interruption of income and use of assets upon your death or disability. Without a trust, your estate or business may be subject to restrictions imposed by the probate court.

Provide Planning for Mental Disability – A trust lets you select a trustee – someone you trust to manage your estate on your behalf in the event you become unable to do so yourself. Read more in Planning for Disability.

Save Money on Estate Taxes – Trusts can help you legally save a substantial amount on estate taxes. Read How to Avoid Estate Taxes to learn more about the credit shelter trust the life insurance trust. A “QTIP” trust or a QDT trust for the benefit of your spouse can further your tax savings goals.

A Charitable Remainder Trust (CRT) or a Charitable Lead Trust (CLT) will help you maximize your tax advantage per charitable dollar. A Grantor Retained Annuity Trusts (GRAT), an Intentionally Defective Grantor Trusts (IDGT), or a Unitrust are advanced trusts that remove appreciation of your property from your estate. Read more in Advanced Estate Planning.

Call the Law Offices of Albert Goodwin at (212) 233-1233 and make an appointment to discuss your estate planning needs.

Comparing a Trust-Based Plan to a Will-Based Plan

The choice between a trust-based and a will-based estate plan deserves careful evaluation. Each has advantages, and the right choice depends on your specific situation. A useful way to compare:

Will-based plan. Simpler to create. Lower upfront cost. Familiar to most people. Probate avoidance not built in. Privacy not built in. Incapacity planning requires separate documents. Asset protection limited. Tax planning available but more limited.

Trust-based plan. More involved to create. Higher upfront cost. Less familiar to most people. Probate avoidance built in for funded assets. Privacy built in. Seamless incapacity planning. Asset protection (with irrevocable trusts) available. Tax planning more flexible.

For most clients with real estate, multiple beneficiaries, or any complexity, a trust-based plan is worth the additional cost. For very simple situations — modest estates, single beneficiary, no real estate — a will-based plan may be sufficient.

When Probate Avoidance Actually Matters

The probate-avoidance benefit of a trust is more or less valuable depending on your situation. Probate matters most when:

• You own real estate, particularly real estate in multiple states.
• You value privacy.
• You have substantial assets that would benefit from continuous management.
• You want to spare your family the delay and cost of probate.
• You have business interests that need continuous attention.
• You expect family disputes that probate would amplify.

Probate matters less when:

• Most of your assets pass by beneficiary designation or joint ownership.
• You have a small estate that qualifies for small estate administration.
• Your family is unified and a will-based plan with cooperative administration would work fine.

The Funding Imperative

The benefits of a trust depend entirely on the trust being properly funded with your assets. A trust document that is signed but never funded provides no probate avoidance, no privacy, no incapacity planning — nothing.

Funding involves retitling each asset into the trust's name during your lifetime. Real estate is transferred by deed. Bank accounts are retitled. Brokerage accounts are reregistered. Vehicles are retitled. Business interests are reassigned. The work takes weeks and requires attention to detail.

When we set up trusts for clients, we treat funding as an essential part of the engagement. The trust document is the first step; the funding is the second and equally important step. Trusts that fail to deliver their benefits almost always fail at the funding stage rather than the drafting stage.

Tax Considerations

The tax treatment of trusts is more nuanced than simply "trusts save taxes." Different trusts have different tax treatments:

• Revocable trusts during the grantor's lifetime are tax-neutral — the grantor pays tax on the trust's income just as if the assets were held in the grantor's own name.
• Revocable trusts after the grantor's death become irrevocable and file their own tax returns. The new basis (with step-up if applicable) takes effect.
• Irrevocable trusts generally file their own returns and pay tax on retained income at compressed trust tax rates.
• Grantor trusts — even irrevocable ones — are taxed to the grantor under specific provisions, which can be beneficial for estate planning purposes.
• Estate and gift tax treatment varies by trust type. Some trusts are designed specifically for estate tax planning; others are not.

The right tax treatment depends on the trust's purposes. Coordinating with a tax advisor familiar with trust taxation is essential for any non-trivial trust planning.

Multiple-Trust Plans

Many estate plans involve more than one trust. A common structure:

• A revocable living trust as the central probate-avoidance and incapacity-planning vehicle.
• One or more irrevocable trusts for specific purposes — an ILIT for life insurance, a SLAT for gift exemption use, a MAPT for Medicaid planning, an SNT for a disabled beneficiary.
• Trusts created at death (testamentary trusts) for beneficiaries who need ongoing structure — minor children, spendthrift beneficiaries, or beneficiaries with disabilities.

These trusts work together as part of the overall plan. The revocable trust handles current administration; the irrevocable trusts achieve specific planning goals; the testamentary trusts handle post-death structure.

Coordinating with Other Documents

A trust does not replace all other estate planning documents. A complete plan still includes:

• A pour-over will to catch any assets you forgot to fund into the trust.
• A durable power of attorney for matters that arise outside the trust's scope.
• A health care proxy and HIPAA authorization for medical decision-making.
• Beneficiary designations updated to coordinate with the trust where appropriate.
• Funeral and burial instructions, if you have specific wishes.

The plan works best when all documents are designed together and reviewed periodically as your situation changes.

Cost-Benefit Analysis

A trust-based estate plan costs more upfront than a basic will. For a single individual or married couple with a typical situation, the difference is generally a few thousand dollars. For larger or more complex estates, the cost is higher but the benefits are also greater.

The upfront cost is typically recovered many times over by the probate savings alone. Probate fees, attorney fees during administration, executor commissions, and the time costs to the family of probate proceedings frequently exceed the trust planning cost by a large margin. The privacy, incapacity, and tax benefits are additional value beyond the direct cost comparison.