Estate plan design: Last will and testament versus revocable living trust

We are frequently asked by clients whether they should use a last will and testament or a revocable living trust as their dispositive estate planning document.

Seniors are often overwhelmed by advertisements to use a trust to “avoid the costs and delays of probate.” While avoiding probate has value in many states, the costs of probate are often oversold, and particularly so in Pennsylvania. For example, the fixed cost of probate in Allegheny County is around $1,800 per million of probate assets (a little less for the first million). These costs only apply to assets that pass under the will (i.e., assets without beneficiary designations or joint owners). In addition, the privacy benefit of avoiding probate is most beneficial for clients who have had careers in the public light and is not as crucial for most people. Furthermore, a will is very effective for a straightforward fact pattern, such as naming direct charitable beneficiaries or one individual beneficiary. Finally, a will is likely easier to read and less confusing for most clients than a revocable living trust.

So, why might you want to consider a trust as your dispositive estate planning document? For many clients, the most relevant factor is whether you own retirement accounts that pass outside of your will. You may think that having a significant amount of wealth in retirement accounts would support using a will, but a trust is often a better solution. Many retirement account custodians (particularly custodians of qualified plans) will only accept simple beneficiary designations such as naming an individual or trust as a beneficiary with limited contingencies, including electing the “per stirpes” designation (per stirpes is when the children of a deceased parent or a parent who disclaims — does not accept an inheritance — step into the shoes of that parent). The “per stirpes” designation can ensure that the children of the deceased or disclaiming parent are named as beneficiaries but does not carry over any specific direction in your will to hold a child’s or grandchild’s share in trust if they are below a certain age. Many beneficiary designation forms do not permit specialized customization and therefore do not include the contingencies that you have planned for under your will or revocable living trust. Using a trust and naming it as a beneficiary (where appropriate) enable these types of accounts to be fully integrated with the contingencies under your estate plan.

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Similarly, naming a special needs trust or a spendthrift trust as a beneficiary of a retirement account can be complicated based on the limitations of beneficiary designation forms. A trust is a solution that includes all your beneficiary options and can be named as the primary (if single) or contingent (if married) beneficiary of a retirement account, investment account or life insurance policy.

The goals and implementation of each client’s estate plan are unique. Some additional factors supporting the choice of a trust are whether you own real estate in another state and whether it is a priority to create less inconvenience for the trustee (compared to the executor of a will) and reduce the cost for administering the trust/estate. When a will has to be administered in other states, your executor would have to hire attorneys licensed in Pennsylvania and in the state where the real estate is located and pay court costs in both states. Even with virtual probate now available in most Pennsylvania counties, the probate of a will is still cumbersome and takes additional time compared to the administration of a trust. With many clients naming their children as an executor or trustee, many parents wish to lighten this burden for their children. Furthermore, a revocable living trust can generate cost savings if the value of the probate assets is enough that the court fees of probate outweigh the increased cost to prepare a trust.

Do you have questions about whether a will-based or trust-based estate plan is the right fit? Please do not hesitate to contact us to discuss these considerations or if it is just the right time to review your estate plan. PJC

Matthew F. Schwartz and John P. Montoya are partners at the law firm Schwartz Montoya, Ltd.