In order to decide whether a trust is best, it is important to understand how each one works. Much has been written lately concerning “living trusts” and their benefits when compared to the more common will and probate process. Each is an important tool and can be appropriate for an individual’s estate plan.
The probate process is the process by which a will is proven by the petitioner (the executor named in the will) in the surrogate’s court in the county in which the decedent resided at death. It is not an enormously complicated or expensive procedure in New York State. Although the law requires that a probate estate be kept open for at least seven months from the date of appointment of the executor, in an average estate most of the paperwork can be completed and the liquid assets can be distributed to the beneficiaries within a few months after appointment of the executor. Once the seven-month period has passed, the executor distributes the balance of the probate assets and has each beneficiary sign a receipt and release for the amount they have received. Once the receipts and releases are filed with the court together with other required legal forms, the estate may be officially closed. Is it possible that an estate may stay open longer than seven month period, if for example, one of the assets of the estate is a small business which must be kept running in order for it to be sold as a going concern. Also, litigation concerning the will can easily delay the completion of the estate for several months or even years.
If any of the beneficiaries or creditors of the estate have questions about what the executor has done with the estate’s assets, then an accounting might be required. An accounting is a separate legal proceeding in which the executor accounts to the surrogate’s court for the assets received and explains what expenses have been paid. It details what will be done with the remaining assets if the court approves of the accounting. Notice is given to all of the interested parties and after any objections are resolved, the executor is discharged or released from further liability. If the executor has paid a claim which the court feels should not have been paid or has in any way wasted assets of the estate, the executor can be made to reimburse the estate for that amount.
One reason people try to avoid probate, when possible, is to avoid its expenses. The expenses of probate (those which are in addition to the unavoidable expenses such as debts of the decedent, expenses of the last illness, funeral expenses and outstanding income and/or estate tax liabilities) are filing fees imposed by the court, administrative expenses, executor’s commissions and attorney’s fees.
Filing fees are nominal in New York State. Even for a quite large estate, the maximum fee is $1,250 plus nominal costs for certified Court documents.
Executor’s commissions are determined with reference to State law and are chargeable at the discretion of the executor. If the executor elects to take them, State law provides for the payment of commissions of 5 percent of the first $100,000 of the probate estate (valued as of the date of death); 4 percent of the next $200,000; 3 percent of the next $700,000 of probate assets and then 2½ percent of any additional amounts up to $4,000,000. For any truly large estates executor’s commissions of 2 percent are chargeable on the amount in excess of $5,000,000.
Although the law allows executors to claim and collect these amounts, any family members who are appointed as executor will often waive these fees, especially if they are also beneficiaries, they will inherit their share free of income tax. Any commissions paid to them are fully subject to Federal and State income tax.
Attorney’s fees are calculated at the discretion of the attorney subject to review and approval of the court. Historically, attorneys have charged the same amount as executor’s commissions for the handling of a probate estate. In recent times, many attorneys have shown a willingness to base their fee on the size of the estate, rather than on the amount of time they actually have to spend in handling estate matters. For relatively small estates, an hourly charge might, in fact exceed the charge based upon a percentage of the estate. In most estates, however, there is a great savings in arranging for the hourly fee method of payment to the attorney rather than a percentage basis.
It is important to select as executor a person who is completely trustworthy and who is knowledgeable in the handling of money and in dealing with assets generally. The executor should be careful to hire an attorney who is knowledgeable in estate planning and probate and who will explain and discuss the process openly, including how his or her fee is calculated.
Trusts are also an important tool in estate planning. There are two basic kinds of trusts: those which are provided for in a will, called testamentary trusts; and those set up during life, called inter vivos trusts. The person who sets up the trust is called the trustor or settlor. The person who is designated to administer the trust is called the trustee. One should use the same care in appointing a trustee as one does in naming an executor.
One type of trust which is often written about is the revocable inter vivos trust, or living trust. The often-cited benefits of living trusts are reduced expenses maintenance of privacy and avoidance of delays which are involved with probate.
Although no court proceedings are required upon death of the settler of a living trust (so that attorney involvement is minimal) an attorney is required to draft the trust, to transfer the necessary assets into the trust, and additional income tax returns must be filed annually. It is possible, therefore, that the legal and accounting fees for a living trust might equal or even exceed the attorney’s fee for probate.
Both filing fees and executor’ commissions are avoided by use of a living trust. Trustees are entitled, however, to an annual commission fixed by statue which is based on the principal balance in the trust. Currently, the annual commissions are $8.50 per $1,000 on the first $400,000 of principal, $4.50 per $1,000 for the next $600,000 of principal and $3 per thousand on all principal amounts over $1,000,000. In addition to these annual fees, the trustee is entitled to receive 1 percent of any principal amount paid out during the term of the trust or distributed upon termination of the trust. Although a family member acting as trustee will generally not take these commissions, an institutional trustee such as a bank or trust may equal or even exceed the cost of a simple probate proceeding.
Many people believe that the use of a revocable or living trust can eliminate Federal and State estate taxes. This is not the case, in fact, as any property in a revocable or living trust will be included in the taxable estate of the settlor. It is possible, however, to plan an estate with a living trust so as to minimize estate taxes in the same manner that can be done with a testamentary credit shelter trust or a disclaimer trust, i.e. a trust which is contained in your will.
A living trust does provide the settlor or grantor privacy as the terms of the trust are not generally recorded or made public. If any real property is transferred into the trust, however, the title insurance company or any lender involved with that property will generally require that the trust agreement itself be produced and reviewed.
In summary, a living trust is an important estate planning tool. If a living trust is used, it generally is still necessary to have a will, called a “pour-over will”, so that certain assets which are not appropriate to place in a trust, such as automobiles, personal possessions, and household furnishings may be dealt with outside the trust. Also, remember that there are other functions which cannot be accomplished in a trust which are more appropriately provided for in a will, such as the designation of guardians for minor children. It is important to discuss the use of a will and/or trust with your estate planning professional. Generally, the least complicated method of achieving your estate plan goals is the best.