There is a significant amount of information circulating that probate is bad and should always be avoided because: 1) probate takes too long and assets are "tied up," 2) probate is expensive, and 3) probate is inefficient for tax purposes. Probate is the legal process of filling the gap in the ownership of a person's assets that occurs upon death. The probate court, a division of the Superior Court in Arizona, is authorized to appoint and empower a "personal representative" to administer a will and transfer assets. In contrast, a living trust "owns assets," because the person creating the trust transferred the assets to the trust during life, enabling a "successor trustee" to administer the estate without seeking authority from the court. This often allows the successor trustee to administer the trust with little or no legal assistance and there is no public record of the contents of the estate or their disposition as would be the case when a will is probated. However, living trusts do not provide the statutory bar to creditors after 4 months that probate provides.
While in some cases probate may indeed be problematic and inefficient, it is not usually the process of probate that is the cause of problems, but rather the facts and circumstances which would likely create the same problems in the administration of a living trust. An analysis of the three aforementioned arguments against probate should help to make it more apparent that both wills and living trusts have their place in estate planning.
The process of probate can be expeditious, and in many cases can result in a distribution of assets as quickly as a living trust. However, both living trusts and wills can involve complicated facts, circumstances, and personalities which can slow down the distribution of assets substantially.
For example, if the a person's child challenges the validity of the person's will, probate will require substantial supervision by the court and thus be much slower than if the validity of the will was not challenged. Similarly, if a person's child challenges the validity the person's living trust, the distribution of the assets held in trust will also be substantially slowed because of court proceedings associated with the challenge.
It is true that in the distant past, probate was often considerably more expensive because legal and personal representative fees were often a percentage of the value of the estate. These days, legal and personal representative fees in Arizona are not percentage-based, so costs associated with wills and living trusts are no longer so different, and any difference could be further reduced or eliminated by the timing of the payment.
When a person, called a trustor, creates a living trust, most of the cost is paid at that time and that money is no longer available for the needs of the trustor. If a will is used as opposed to a living trust, the costs will be paid after death from the remaining assets. If a person lives for a substantial amount of time after a living trust is created, part of the eventual costs of probate can be offset by time value of money considerations.
For example, if a lawyer creates a living trust at a cost of $2,500 when the cost of probate would be $3,5000, if a person lives another 25 years, the cost of probate, discounted for interest rates and inflation, could actually be less than the cost of creating a living trust in terms of today’s dollars.
Estates that are probated and estates that are held in living trust are subject to the same tax rates and the same tax exemptions. All of the tax advantages of so-called credit-shelter trusts which allow lawfully married couples to effectively double the amount of assets that are exempt from estate tax are available through both wills and living trusts.
For example, upon his death a husband gives his half of a couple's $2 Million estate, or $1 Million, to a credit-shelter trust created by either a will or living trust whose income (and principal, if needed) his wife may access. His wife dies six months later with her estate valued at $1 Million. Neither the husband's or the wife's estate would be subject to the estate tax, assuming a $1 Million exemption from 2011 and on (more about the status of the estate tax). It makes no difference whether the estate is probated or a living trust is used, if appropriate language is included in the will or trust agreement.
Both living trusts and wills are good estate planning devices. A person must consider his/her specific situation and needs before making a decision about his/her estate plan.
This brief overview of some important considerations associated with wills and living trusts is by no means comprehensive. Always seek the advice of a competent professional when making important probate-related living trust-related decisions.